865 Assistant Commissioner of Income Tax V Ahmedabad Urban Development Authority 19 Oct 2022 440396

2022 LiveLaw (SC) 865
IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION
UDAY UMESH LALIT; CJI., S. RAVINDRA BHAT; J., PAMIDIGHANTAM SRI NARASIMHA; J.
October 19, 2022
ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS)
versus
AHMEDABAD URBAN DEVELOPMENT AUTHORITY
Income Tax Act 1961 - Tax exemption for charitable purposes - Section 2(15) - An
assessee advancing general public utility cannot engage itself in any trade,
commerce or business, or provide service in relation thereto for any consideration-
However, in the course of achieving the object of general public utility, the concerned
trust, society, or other such organization, can carry on trade, commerce or business
or provide services in relation thereto for consideration, provided that the activities
of trade, commerce or business are connected to the achievement of its objects of
GPU; and the receipts do not exceed the quantified limit. (Para 253)
Income Tax Act 1961 - Tax exemption for charitable purposes -Section 2(15)-for
achieving a general public utility object, if the charity involves itself in activities, that
entail charging amounts only at cost or marginal mark up over cost, and also derive
some profit, the prohibition against carrying on business or service relating to
business is not attracted - if the quantum of such profits do not exceed 20% of its
overall receipts. (Para 172)
Income Tax Act 1961; Section 2(15) - Amounts charged by statutory authorities,
corporations, statutory regulatory authorities for their public activities can't be
treated as commercial receipts-However, if the amounts collected are significantly
higher than the costs incurred, it can be treated as commercial income. (Para 253)
Income Tax Act 1961; Section 2(15) - Tax exemption for professional bodies like ICAI-
bodies which regulate professions and are created by or understatutes which are
enjoined to prescribe compulsory courses to be undergone before the individuals
concerned is entitled to claim entry into the profession or vocation, and also
continuously monitor the conduct of its members do not ipsofacto carry on activities
in the nature of trade, commerce or business, or services in relation thereto-However,
this is subject to the caveat that if the assessing authorities discern that certain kinds
of activities carried out by such regulatory body involved charging of fees that are
significantly higher than the cost incurred (with a nominal mark-up) or providing other
facilities or services such as admission forms, coaching classes, registration
processing fees, etc., at markedly higher prices, those would constitute commercial
or business receipts. (Para 196, 253)
CIVIL APPEAL NO. 21762 OF 2017 WITH C.A. No. 8193/2012; C.A. No. 5057/2012; C.A. No. 5058/2014; C.A. No. 9974/2018; C.A.
No. 5056/2012; C.A. No. 4196/2015; C.A. No. 4374/2015; C.A. No. 9380/2017; C.A. No. 13071/2017; C.A. No. 12058/2017; C.A. No.
16375/2017; C.A. No. 12869/2017; C.A. No. 17527/2017; C.A. No. 21845/2017; C.A. No. 5719/2018; C.A. No. 9886/2018; C.A. No.
2477/2021; C.A. No. 2478/2021; C.A. No. _____/2022 @ SLP(C) No. 23975/2012; C.A. No. _____/2022 @ SLP(C) No. 15547/2013;
C.A. No. ______/2022 @ SLP(C) No. 15040/2019; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 39525/2017;
C.A. No. _____/2022 @ SLP(C) No. 14574/2019; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 16597/2020;
C.A. No. _____/2022 @ SLP(C) No. 10912/2018; C.A. No. _____/2022 @ SLP(C) No. 12304/2018; C.A. No. _____/2022 @ SLP
(C) No. _____/2022 @ Diary No(s). 44856/2018; C.A. No. _____/2022 @ SLP(C) No. 6553/2019; C.A. No. _____/2022 @ SLP (C)
1
No. _____/2022 @ Diary No(s). 15525/2019; C.A. No. _____/2022 @ SLP(C) No. 30597/2018; C.A. No. _____/2022 @ SLP (C) No.
_____/2022 @ Diary No(s). 5683/2019; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 15488/2019; C.A. No.
_____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 15489/2019; C.A. No. _____/2022 @ SLP(C) No. 15055/2019; C.A. No.
_____/2022 @ SLP(C) No. 15079/2019; C.A. No. _____/2022 @ SLP(C) No. 14995/2019; C.A. No. _____/2022 @ SLP (C) No.
_____/2022 @ Diary No(s). 21237/2019; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 17255/2020; C.A. No.
_____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 17316/2020; C.A. No. _____/2022 @ SLP(C) No. 1404/2021; C.A. No.
_____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 19394/2020; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary
No(s). 19399/2020; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 19403/2020; C.A. No. _____/2022 @ SLP(C)
No. 11486/2020; C.A. No. _____/2022 @ SLP(C) No. 11124/2020; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s).
19449/2020; C.A. No. _____/2022 @ SLP(C) No. 12206/2020; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s).
20986/2020; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 23310/2020; C.A. No. _____/2022 @ SLP(C) No.
3759/2021; C.A. No. _____/2022 @ SLP(C) No. 4612/2021; C.A. No. _____/2022 @ SLP(C) No. 5167/2021; C.A. No. _____/2022
@ SLP(C) No. 6253/2021; C.A. No. _____/2022 @ SLP(C) No. 5709/2021; C.A. No. _____/2022 @ SLP(C) No. 6005/2021; C.A.
No. _____/2022 @ SLP(C) No. 7166/2021; C.A. No. _____/2022 @ SLP(C) No. 7003/2021; C.A. No. _____/2022 @ SLP(C) No.
No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 5806/2021; C.A. No. _____/2022 @ SLP(C) No. 4636/2021; C.A. No.
_____/2022 @ SLP(C) No. 4723/2021; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 6662/2021; C.A. No.
_____/2022 @ SLP(C) No. 10490/2021; C.A. No. _____/2022 @ SLP(C) No. 6686/2021; C.A. No. _____/2022 @ SLP(C) No.
No. _____/2022 @ SLP(C) No. 7854/2021; C.A. No. _____/2022 @ SLP(C) No. 7789/2021; C.A. No. _____/2022 @ SLP(C) No.
11072/2021; C.A. No. _____/2022 @ SLP(C) No. 11683/2021
JUDGMENT
S. RAVINDRA BHAT, J.
Index
I. Brief history of legislative changes and this court’s interpretation .............................................................................. 4
A. Provisions of the Income Tax Act, 1922 .............................................................................................................................. 4
B. The new law: Income Tax Act, 1961 .................................................................................................................................... 6
C. The judgment in Surat Art Silk .............................................................................................................................................. 8
D. Relevant changes brought about to the IT Act, 1961 (Finance Act, 1983 and 1991) ................................................ 11
E. The judgment in Thanthi Trust ............................................................................................................................................ 12
F. Deletion of certain exemptions: Section 10 (20A) and Section 10 (23) ........................................................................ 13
G. Amendments to Section 2 (15) by Finance Act, 2008 (w.e.f. 01.04.2009) .................................................................. 14
II. Submissions of parties .......................................................................................................................................................... 15
A. Arguments on behalf of the revenue .................................................................................................................................. 15
B. Arguments of the assessee-organizations ........................................................................................................................ 17
C. Revenue’s rebuttal arguments ............................................................................................................................................ 32
III. Analysis and reasoning ........................................................................................................................................................ 33
A. Aids to interpretation ............................................................................................................................................................ 37
(i) History of the legislation .................................................................................................................................................. 37
(ii) Other extrinsic aids to construction of the statute ....................................................................................................... 38
B. Interpretation of Section 2(15), the definition clause ....................................................................................................... 42
Summation of interpretation of Section 2(15) ................................................................................................................... 51
C. Sections 10, 11, 12, 12A, 12AA and 13 of the IT Act ...................................................................................................... 51
Distinction between business held under Trust [Section 11(4)] and Trust carrying on business [Section 11(4A)] 52
D. What kinds of income or receipts may not be characterized as derived from trade, commerce, business or in
relation to such activities, for a consideration ....................................................................................................................... 58
(i) Statutory corporations, authorities or bodies ................................................................................................................ 58
(ii) Statutory regulatory bodies/authorities ......................................................................................................................... 64
(iii) Trade Promotion bodies, councils, associations or organizations........................................................................... 66
(iv) Non-statutory bodies - ERNET, NIXI and GS1 India ................................................................................................. 68
2
(v) State Cricket Associations ............................................................................................................................................. 71
(vi) Private trusts ................................................................................................................................................................... 79
IV. Summation of conclusions ................................................................................................................................................. 82
A. General test under Section 2(15) ....................................................................................................................................... 82
B. Authorities, corporations, or bodies established by statute ............................................................................................ 82
C. Statutory regulators .............................................................................................................................................................. 83
D. Trade promotion bodies ....................................................................................................................................................... 83
E. Non-statutory bodies ............................................................................................................................................................ 83
F. Sports associations............................................................................................................................................................... 84
G. Private Trusts ........................................................................................................................................................................ 84
H. Application of interpretation ................................................................................................................................................ 84
1. Leave granted in all matters where leave has not already been granted. C.A. No.
21762/2017 (Assistant Commission of Income Tax, Exemptions v. Ahmedabad Urban
Development Authority) is taken as the lead matter.
2. Religious and charitable trusts have existed in one form or the other, tracing their
origins to the instinct of benevolence, which is part of human nature. Indian philanthropy has
enriched its cultural heritage, particularly in catering to the educational, medical, socio-
economic, and religious needs of the people. Here its role has been supplementary to the
efforts of the State, which has recognized the public utility of this impulse, and granted tax
exemptions. Indian income-tax laws have favoured charities, even granted preferential
treatment since 1886. The law, while granting exemption to income from religious and
charitable trusts has taken effective measures to minimise misuse of trust funds. As a result,
a charitable trust loses tax exemption if certain provisions are not complied with, and if its
activities do not fall under Section 10 of the Act. Such trusts also have to apply their income
to the charitable objects within a specified period, maintain proper audited accounts, and
invest or utilise funds in a manner so that no benefit is derived by the settlor, trustees, their
relatives, or other persons.1
3. The scope and amplitude of the definition “charitable purpose” under the Income Tax
Act, 1961 (hereafter “Income Tax Act" or “the IT Act”) has engaged the courts’ (including
that of this court) attention on myriad occasions. The expression “not involving the carrying
on of any activity for profit” in the last limb of the definition [Section 2(15) prior to amendment
by Finance Act, 1983] was the subject of debate in no less than five judgments of this court
(including that of a five-member bench).
4. In these batch of appeals and special leave petitions, the primary question which falls
for consideration is the correct interpretation of the proviso to Section 2(15)2 of the IT Act
introduced by amendment w.e.f. 01.04.2009. It is necessary, at this stage, to notice that the
IT Act visualized three kinds of charitable purposes: medical relief, education, and relief for
the poor – which are described hereafter as “per se purposes”. To this list, Parliament has,
1
Sections 11, 12, 12-A and 13 of the Income-tax Act, 1961.
2
“charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds,
forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any
other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the
carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any
trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or
retention, of the income from such activity:..…”
(emphasis supplied)
3
by amendments, added other categories, such as preservation of environment (including
watersheds, forests, and wildlife) and preservation of monuments or places or objects of
artistic or historic interest, and yoga. The last – or the residual purpose included by the
definition - is “advancement of any other object of general public utility” (hereafter referred
to as “GPU category”), which is the subject of interpretation in the present case.
5. The Director General of Income Tax for exemptions, Commissioner of Income Tax
(“CIT”) in various states, and other officials of the Income tax department (hereafter
compendiously referred to as “the revenue”) have appealed the decisions of various High
Courts, which have held that the carrying on of any trade, commerce, or business, is not a
per se bar or disqualification for a GPU category charitable trust to claim to be such,
precluding its tax-exempt status under the IT Act.
I. Brief history of legislative changes and this court’s interpretation
A. Provisions of the Income Tax Act, 1922
6. The provisions of the erstwhile Income Tax Act, 1922 (hereafter “the old Act”) enabled
tax exemption claims by trusts for their income from business activity, provided trusts were
created thereon. The Privy Council in The Trustees of Tribune Press, Lahore v. CIT, Punjab3
(hereafter “In Re: Trustees of the Tribune”) held that the income of the Tribune Press fell
within section 4(3)(i) of the old Act, and it was implied that income from the press was derived
from property held under trust to maintain a newspaper, to keep up its liberal policy and to
devote surplus funds to improve the newspaper. The word “property” occurring under section
4(3)(i) of that Act was also held4 to include a business too. The old Act was amended twice
with the object of eliminating and getting rid of tax exemptions for trusts, which were
otherwise eligible for it. The first amendment of 1939 inserted5 a new clause (ia) in the then
existing provision. This provided that income derived from business carried on by or on
behalf of a charitable trust or religious institution could be limited to only such business
income as was derived by the trust or institution from business carried on either in the course
of the carrying on of a trust’s primary purpose, or carried on mainly by the beneficiaries of
the trust or institution. The Lahore High Court in Charitable Gadodia Swadeshi Stores v.
CIT6, observed:
“Viewed in its proper perspective, therefore, clause (ia) can be taken to apply only such business
as is carried on behalf of religious or charitable institutions which were not held under trust and not
3
(1939) 7 ITR 415 (hereafter “In Re: Trustees of the Tribune”).
4
In Commissioner of Income Tax v. P. Krishna Warriar, (1964) 8 SCR 36 : (1964) 53 ITR 176 this court, citing and relying on In
re, Trustees of the Tribune [(1939) ITR 415 PC] held that:
“This Court in J.K. Trust, Bombay v. Commissioner of Income Tax, Excess Profits Tax, Bombay [(1957) 32 ITR
535] endorsed the said view and held that “property” is a term of the widest import and that business would undoubtedly be property
unless there was something to the contrary in the enactment. If business was property, it could be held under trust for religious and
charitable purposes. As the business of running the Arya Vaidya Sala vested under trust for religious and charitable purposes, it
would fall under clause (i), if the other conditions laid down therein were satisfied.”
5
Section 4(3) of the Indian Income-tax (Amendment) Act, 1939, reads as follows:
“(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving
them:]
(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or
other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application
to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held
in part only for such purposes, the income applied or finally set apart for application thereto:
(ia) Any income derived from business carried on on behalf of a religious or charitable institution when the income is applied solely
to the purposes of the institution and-
(a) the business is carried on in the course of the carrying out of a primary purpose of the institution, or (b) the work in connection
with the business is mainly carried on by beneficiaries of the institution”
6
(1944) 12 ITR 385
4
to such business as was itself held under trust or was conducted by or on behalf of such charitable
or religious institutions as were held under trust. If it was intended to narrow down the scope of
clause (1) so as to withdraw the exemption enjoyed by a business held under trust or conducted by
or on behalf of a religious or charitable trust, the new clause should have been added as proviso to
the old clause.”
7. The Act was again amended by the Finance Act, 1953 7 wherein clause (ia) was
deleted from section 4(3)(i) of the old Act and instead inserted as its proviso. Parliamentary
intent, in transforming old clause (ia) into a proviso to Section 4 (3)(i) was that whenever
business was carried on behalf of a religious or charitable institution, the conditions
prescribed in clause (b) of proviso to clause (i) had to be satisfied in addition to the general
condition of exemption set out in the substantive part of clause (i). Parliament’s attempt to
exempt income from business activity upon complying with other conditions - apart from
those laid down in clause (i) - was interpreted by this court in CIT v. P. Krishna Warriar8
(hereafter “Krishna Warriar”). The court observed that:
“The legal position may briefly be stated thus: Clause (i) of section 4(3) of the Act takes in
every property or a fractional part of it held in trust wholly for religious or charitable purposes.
It also takes in such property held only in part for such purposes. Business is also property
within the meaning of said clause. Clause (b) of the proviso to section 4(3)(i) applies only to
business not held in trust but carried on on behalf of religious or charitable institutions.”
8. The old Act defined ‘charitable purpose’ under Section 4(3) - i.e., the definition as it
stood just prior to the IT Act, 1961 coming into force (thereby replacing the old Act) - as
follows:
“4 (3) Any income, profits or gains falling within the following classes shall not be included in the
total income of the person receiving them * * *
In this sub-section “charitable purpose” includes relief of the poor, education, medical relief and the
advancement of any other object of general public utility, but nothing contained in clause (i) or clause
(ii) shall operate to exempt from the provisions of this Act that part of the income from property held
under a trust or other legal obligation for private religious purposes which does not enure for the
benefit of the public.”
This court had occasion to interpret the meaning of the expression “advancement of any
other object of general public utility” in CIT v. Andhra Chamber of Commerce9. The court
considered previous decisions in: In Re: Trustees of the Tribune (supra) and All India
7
Section 4 of Finance Act, 1953 added proviso to Section 4(3)(i); it reads as follows:
“Provided that such income shall be included in the total income—
[(a) if it is applied to religious or charitable purposes without the taxable territories, but in the following cases, namely:—
(i) where the property is held under trust or other legal obligation created before the commencement of the-Indian Income-
tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without the taxable territories;
and
(ii) where the property is held under trust or other legal obligation created after such commencement, and the income therefrom
is applied without the taxable territories to charitable purposes which tend to promote international welfare in which India is
interested, the Central Board of Revenue may, by general or special order, direct that it shall not be included in the total income;]
(b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the income is
applied wholly for the purposes of the institution and either—
(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or
(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution;
(c) if it is applied to purposes other than religious or charitable purposes or ceases to be accumulated or set apart for application
thereto in which case it shall be deemed to be the income of the year in which it is so applied or ceases to be so accumulated or set
apart.]”
8
(1964) 8 SCR 36: (1964) 53 ITR 176
9
(1965) 1 SCR 565 (hereafter “Andhra Chamber of Commerce”)
5
Spinners Association of Mirzapur v. CIT 10 . Relying heavily on the decision of the Privy
Council in In Re: Trustees of the Tribune (supra), this court held, in Andhra Chamber of
Commerce that GPU objects included all objects promoting welfare of general public,
including taking steps to oppose or urge legislation affecting trade, commerce, etc.
B. The new law: Income Tax Act, 1961
9. Section 2 (15) of the IT Act (which came into force on 01.04.1962 and repealed the
old IT Act) defined “charitable purpose” as follows:
“(15) ― charitable purpose includes relief of the poor, education, medical relief, and the
advancement of any other object of general public utility not involving the carrying on of any activity
for profit.”
10. The then Finance Minister, Mr. Morarji Desai, explained the rationale for the new
definition on the floor of Lok Sabha:
“The definition of ‘charitable purpose’ in that clause is at present so widely worded that it can be
taken advantage of even by commercial concerns which, while ostensibly serving a public purpose,
get fully paid for the benefits provided by them, namely, the newspaper industry which while running
its concern on commercial line can claim that by circulating newspapers it was improving the general
knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select
Committee felt that the words ‘not involving the carrying on of any activity for profit’ should be added
to the definition.”11
11. The first major decision to interpret the new definition was Sole Trustee, Lok
Shikshana Trust v. Commissioner of Income Tax12 (hereafter “Lok Shikshana Trust”). This
court turned down a contention that newspaper business, carried on with several other
objects (which included setting up of educational institutions, dissemination of knowledge to
the Kannada speaking public through newspaper, etc.) was charitable. The court noticed the
changed definition:
“7.…The result thus of the change in the definition is that in order to bring a case within the fourth
category of charitable purpose, it would be necessary to show that (1) the purpose of the trust is the
advancement of any other object of general public utility, and (2) the above purpose does not involve
the carrying on of any activity for profit. Both the above conditions must be fulfilled before the
purpose of the trust can be held to be charitable purpose. * * *
9. It is true that there are some business activities like mutual insurance and co-operative stores of
which profit-making is not an essential ingredient, but that is so because of a self-imposed and
innate restriction on making profit in the carrying on of that particular type of business. Ordinarily
profit motive is a normal incidence of business activity and if the activity of a trust consists of carrying
on of a business and there are no restrictions on its making profit, the court would be well justified
in assuming in the absence of some indication to the contrary that the object of the trust involves
the carrying on of an activity for profit…….. By the use of the expression ‘profit motive’ it is not
intended that profit must in fact be earned. Nor does the expression cover a mere desire to make
some monetary gain out of a transaction or even a series of transactions. It predicates a motive
which pervades the whole series of transactions effected by the person in the course of his
activity….”
The court also rejected the submission that the “profit” referred to meant private profit. It held
that the term had to be interpreted without qualification.
10
(1944) 12 ITR 482 (hereafter “All India Spinners Association of Mirzapur”)
11
(LVI) Lok Sabha Debates., 32nd scs., p. 3073 (August 18, 1961).
12
(1976) 1 SCC 254 (hereafter “Lok Shikshana Trust”)
6
12. One of the judges - Beg, J, concurred with the majority, but after noticing that the trust
deed did not contain any condition on profit-making, expressed a slightly different view
emphasizing that the actual activity needs to be considered, rather than the absence or
existence of any condition, in the trust deed.
13. The next decision of importance is Indian Chamber of Commerce v. CIT 13 . The
appellant-chamber was a company registered under Section 25 of the Indian Companies
Act, 1913. Its memorandum and articles of association stipulated certain broad objects,
which this court agreed fell within the expression “the advancement of any … object of
general public utility” in Section 2(15) of the Act. The objects were “promotional and
protective of Indian trade interests and other allied service operations”. A residual clause
authorised the chamber “to do all other things as may be conducive to the development of
trade, commerce and industries or incidental to attainment of the above objects or any of
them”. As per clauses (4) and (8) of the memorandum of association, the chamber’s member
could not stand to gain personally since no portion of “income and property of the association
shall be paid … directly or indirectly, by way of dividend or bonus or otherwise howsoever by “way
of profit to the persons who at any time are ... members of the Association ....”
On dissolution of the association, the members could not claim any share in the assets. The
chamber, conceded before this court, that it “by and large, strives to advance the general
trade interests of India and Indian without seeking to make profits for its members.” This
court denied the exemption claimed, holding that:
“14… The attainment of that object shall not involve activities for profit. What then is an activity for
profit? An undertaking by a business organisation is ordinarily assumed to be for profit unless
expressly or by necessary implication or by eloquent surrounding circumstances the making of profit
stands loudly negatived. We will illustrate to illumine. If there is a restrictive provision in the bye-laws
of the charitable organisation which insists that the charges levied for services of public utility
rendered are to be on a ‘no profit” basis, it clearly earns the benefit of Section 2(15). For instance,
a funeral home, an S.P.C.A. or a cooperative may render services to the public but write a condition
into its constitution that it shall not charge more than is actually needed for the rendering of the
services, — maybe it may not be an exact equivalent, such mathematical precision being impossible
in the case of variables, — maybe a little surplus is left over at the end of the year — the broad
inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit.
As an antithesis, take a funeral home or an animal welfare organisation or a super bazaar run for
general public utility by an institution which charges large sums and makes huge profits. Indubitably
they render services of general public utility. Their objects are charitable but their activities are for
profit…
**********
16. To sum up, Section 2(15) excludes from exemption the carrying on of activities for profit even if
they are linked with the objectives of general public utility, because the statute interdicts, for
purposes of tax relief, the advancement of such objects by involvement in the carrying on of activities
for profit. We appreciate the involved language we use, but when legislative draftsmanship declines
to be simple, interpretative complexity becomes a judicial necessity.
**********
21. The true test is to ask for answers to the following questions: (a) Is the object of the assessee
one of general public utility? (b) Does the advancement of the object involve activities bringing in
moneys? (c) If so, are such activities undertaken (i) for profit or (ii) without profit? Even if (a) and (b)
are answered affirmatively, if (c)(i) is answered affirmatively, the claim for exemption collapses. The
solution to the problem of an activity being one for or irrespective of profit is gathered on a footing
13
(1976) 1 SCC 324 (hereafter “Indian Chamber of Commerce”)
7
of facts. What is the real nature of the activity? One which is ordinarily carried on by ordinary people
for gain? Is there a built-in prescription in the constitution against making a profit? Has there been
in practice, profit from this venture? Although, this last is a weak test. The mere fact that a service
is rendered is no answer to chargeability because all income is often derived by rendering some
service or other.”
C. The judgment in Surat Art Silk
14. The judgment by a larger, five-judge Bench, in Assistant Commissioner v. Surat Art
Silk Cloth Manufacturers’ Association14 (hereafter “Surat Art Silk”) was the most important
decision rendered on the issue. Here a Section 25 (of the Companies Act, 1956
corresponding to Section 8 of the Companies Act, 2013) non-profit company was
established. It claimed exemption as an institution with charitable purposes as its objectives.
The objects of the company included promoting commerce and trade in Art Silk yarn, raw
silk, cotton yarn, Art Silk cloth, silk cloth, and cotton cloth, among other objects15.Clause 5(1)
of the company’s memorandum provided that its income and property wheresoever derived
was to be applied “solely for the promotion of its objects as set forth in the Memorandum”;
Clause 5(2) directed that no portion of the income or property could be paid or transferred,
directly or indirectly, by way of dividend, bonus, or otherwise by way of profit, to persons,
who at any time are or had been members of the assessee. The Income Tax Appellate
Tribunal (hereafter “ITAT”) after initial remand to the Appellate Commissioner, held that “the
primary purpose for which the assessee was established was to promote commerce and
trade in Art Silk and Silk Yarn and Cloth”. The ITAT made a direct reference of the issue, to
this court, since a conflict existed with regard to the correct interpretation of the residual
clause, i.e., institutions engaged in the advancement of objects of general public utility, and
whether the company was entitled to be assessed as one carrying on activities that
amounted to charitable purposes. This court first determined that the primary or dominant
object of the company was promotion and development of trade in silk, silk cloth, yarn and
other such items and that the other objects were subsidiary to this primary object. It then
held that the requirement of absence of profit motive, was satisfied:
“7...but this requirement was also satisfied in the case of the assessee, because the object of private
profit was eliminated by the recognition of the assessee under section 25 of the Companies Act,
1956 and clauses 5 and 10 of its Memorandum. It must, therefore, be held that the income and
property of the assessee were held under a legal obligation for the purpose of advancement of an
object of general public utility within the meaning of section 2 clause (15).”
15. This court then held that the words of prohibition occurring at the end of Section 2(15)
were applicable to the last category of charitable institutions, i.e., those involved in the
advancement of objects of general public utility. It further clarified that the prohibition applied
to the object and not the advancement or attainment of the said object:
“10a. It is clear on a plain natural construction of the language used by the legislature that the ten
crucial words “not involving the carrying on of any activity for profit” go with “object of general public
14
(1980) 2 SCC 31 (hereafter “Surat Art Silk”)
15
The list of objects were as follows:
“(a) To promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth.
(b) To carry on all and any of the business of Art Silk Yarn, Raw Silk, Cotton Yarn as well as Art Silk Cloth, Silk Cloth and
Cotton Cloth belonging to and on behalf of the members.
(c) To obtain import licences for import of Art Silk Yarn, Raw Silk, Cotton Yarn and other raw materials as well as accessories
required by the members for the manufacture of Art Silk, Silk and Cotton Fabrics.
(d) To obtain export licences and export cloth manufactured by the members.
(e) To buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on behalf of the members.
(n) To do all other lawful things as are incidental or conducive to the attainment of the above objects.”
8
utility” and not with “advancement”. It is the object of general public utility which must not involve the
carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these
last ten words is the linking of activity for profit with the object of general public utility and not its
linking with the accomplishment or carrying out of the object. It is not necessary that the
accomplishment of the object or the means to carry out the object should not involve an activity for
profit. That is not the mandate of the newly added words. What these words require is that the object
should not involve the carrying on of any activity for profit. The emphasis is on the object of general
public utility and not on its accomplishment or attainment. The decisions of the Kerala and Andhra
Pradesh High Courts in CIT v. Cochin Chamber of Commerce and Industry [(1973) 87 ITR 83 :
(Ker)16 and A.P. State Road Transport Corporation v. CIT [(1975) 100 ITR 392 (AC)], in our opinion
lay down the correct interpretation of the last ten words in Section 2 clause(15). The true meaning
of these last ten words is that when the purpose of a trust or institution is the advancement of an
object of general public utility, it is that object of general public utility and not its accomplishment or
carrying out which must not involve the carrying on of any activity for profit.”
16. The court then went on to hold what is meant by “not involving the carrying on an
activity for profit”:
“15. …The question that is necessary to be asked for this purpose is as to when can the purpose of
a trust or institution be said to involve the carrying on of any activity for profit. The word “involve”
according to the Shorter Oxford Dictionary means “to enwrap in anything, to enfold or envelop; to
contain or imply”. The activity for profit must, therefore, be intertwined or wrapped up with or implied
in the purpose of the trust or institution or in other words it must be an integral part of such purpose.
But the question again is what do we understand by these verbal labels or formulae; what is it
precisely that they mean? Now there are two possible ways of looking at this problem of
construction. One interpretation is that according to the definition what is necessary is that the
purpose must be of such a nature that it involves the carrying on of any activity for profit in the sense
that it cannot be achieved without carrying on an activity for profit. On this view, if the purpose can
be achieved without the trust or institution engaging itself in an activity for profit, it cannot be said
that the purpose involves the carrying on of an activity for profit…
****************** **************
16. The other interpretation is to see whether the purpose of the trust or institution in fact involves
the carrying on of an activity for profit or in other words whether an activity for profit is actually carried
on as an integral part of the purpose or to use the words of Chandrachud, J, as he then was in
Dharmodayam case [(1977) 4 SCC 75] , “as a matter of advancement of the purpose”. There must
be an activity for profit and it must be involved in carrying out the purpose of the trust or institution
or to put it differently, it must be carried on in order to advance the purpose or in the course of
carrying out the purpose of the trust or institution. It is then that the inhibition of the exclusionary
clause would be attracted. This appears to us to be a more plausible construction which gives
meaning and effect to the last concluding words added by the legislature and we prefer to accept it.
Of course, there is one qualification which must be mentioned here and it is that if the constitution
of a trust or institution expressly provides that the purpose shall be carried out by engaging in an
activity which has a predominant profit motive, as, for example, where the purpose is specifically
stated to be promotion of sports by holding cricket matches on commercial lines with a view to
making profit, there would be no scope for controversy, because the purpose would, on the face of
it, involve carrying on of an activity for profit and it would be non-charitable even though no activity
for profit is actually carried on or, in the example given, no cricket matches are in fact organised.
17. The next question that arises is as to what is the meaning of the expression “activity for profit”.
Every trust or institution must have a purpose for which it is established and every purpose must for
its accomplishment involve the carrying on of an activity. The activity must, however, be for profit in
order to attract the exclusionary clause and the question therefore is when can an activity be said
16
This decision was reversed in Indian Chamber of Commerce v. Commissioner of Income Tax (1976) 1 SCC 324
9
to be one for profit? The answer to the question obviously depends on the correct connotation of
the preposition “for”. This preposition has many shades of meaning but when used with the active
participle of a verb it means “for the purpose of” and connotes the end with reference to which
something is done. It is not therefore enough that as a matter of fact an activity results in profit but
it must be carried on with the object of earning profit. Profit-making must be the end to which the
activity must be directed or in other words, the predominant object of the activity must be making a
profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the
charitable purpose, it would not be correct to describe it as an activity for profit. But where, on the
other hand, an activity is carried on with the predominant object of earning profit, it would be an
activity for profit, though it may be carried on in advancement of the charitable purpose of the trust
or institution. Where an activity is carried on as a matter of advancement of the charitable purpose
or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter
of plain English grammar that the charitable purpose involves the carrying on of such activity, but
the predominant object of such activity must be to subserve the charitable purpose and not to earn
profit. The charitable purpose should not be submerged by the profit making motive; the latter should
not masquerade under the guise of the former….”
17. The court took note of the judgment of Pathak, J. in Dharmadeepti v. CIT17 as well as
the speech of then then Finance Minister, and further observed:
“17. ….It is obvious that the exclusionary clause was added with a view to overcoming the decision
of the Privy Council in the Tribune case [AIR 1939 PC 208: In Re the Trustees of the Tribune, (1939)
7 ITR 415] where it was held that the object of supplying the community with an organ of educated
public opinion by publication of a newspaper was an object of general public utility and hence
charitable in character, even though the activity of publication of the newspaper was carried on
commercial lines with the object of earning profit. The publication of the newspaper was an activity
engaged in by the trust for the purpose of carrying out its charitable purpose and on the facts it was
clearly an activity which had profit making as its predominant object, but even so it was held by the
Judicial Committee that since the purpose served was an object of general public utility, it was a
charitable purpose. It is clear from the speech of the Finance Minister that it was with a view to
setting at naught this decision that the exclusionary clause was added in the definition of “charitable
purpose”. The test which has, therefore, now to be applied is whether the predominant object of the
activity involved in carrying out the object of general public utility is to subserve the charitable
purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose,
though an object of general public utility, would cease to be a charitable purpose. But where the
predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would
not lose its character of a charitable purpose merely because some profit arises from the activity.
The exclusionary clause does not require that the activity must be carried on in such a manner that
it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution
to so carry on the activity that the expenditure balances the income and there is no resulting profit…..
18. The court proceeded to quote from passages in its previous judgments, in Lok
Shikshana Trust and Indian Chamber of Commerce (supra) to the effect that if the activity of
a trust consists of carrying on a business and there are no restrictions on profit-making, the
court could assume (in the absence of something to the contrary) that the trust’s object
involved carrying on of an activity for profit. The Constitution Bench disagreed with the
approach in both the previous judgments, and observed:
“19. …Now we entirely agree with the learned Judges who decided these two cases that activity
involved in carrying out the charitable purpose must not be motivated by a profit objective but it must
be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find
it difficult to accept their thesis that whenever an activity is carried on which yields profit, the
inference must necessarily be drawn, in the absence of some indication to the contrary, that the
17
(1978) 3 SCC 499
10
activity is for profit and the charitable purpose involves the carrying on of an activity for profit. We
do not think the Court would be justified in drawing any such inference merely because the activity
results in profit. It is in our opinion not at all necessary that there must be a provision in the
constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that
profit shall be proscribed. Even if there is no such express provision, the nature of the charitable
purpose, the manner in which the activity for advancing the charitable purpose is being carried on
and the surrounding circumstances may clearly indicate that the activity is not propelled by a
dominant profit motive. What is necessary to be considered is whether having regard to all the facts
and circumstances of the case, the dominant object of the activity is profit making or carrying out a
charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the
latter, the charitable character of the purpose would not be lost.
20. If we apply this test in the present case, it is clear that the activity of obtaining licences for import
of foreign yarn and quotas for purchase of indigenous yarn, which was carried on by the assessee,
was not an activity for profit. The predominant object of this activity was promotion of commerce and
trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth, which was
clearly an object of general public utility and profit was merely a bye-product which resulted
incidentally in the process of carrying out the charitable purpose. It is significant to note that the
assessee was a Company recognised by the Central Government under Section 25 of the
Companies Act, 1956 and under its Memorandum of Association, the profit arising from any activity
carried on by the assessee was liable to be applied solely and exclusively for the promotion of trade
and commerce in various commodities which we have mentioned above and no part of such profit
could be distributed amongst the members in any form or under any guise. The profit of the assessee
could be utilised only for the purpose of feeding this charitable purpose and the dominant and real
object of the activity of the assessee being the advancement of the charitable purpose, the mere
fact that the activity yielded profit did not alter the charitable character of the assessee. We are of
the view that the Tribunal was right in taking the view that the purpose for which the assessee was
established was a charitable purpose within the meaning of Section 2 clause (15) and the income
of the assessee was exempt from tax under Section 11. The question referred to us in each of these
references must, therefore, be answered in favour of the assessee and against the Revenue.”
19. There was, however, a discordant note in Surat Art Silk - A.P. Sen, J disagreed with
the majority, and delivered a dissenting opinion. Explaining how there were no restrictive
words or conditions, under the old IT Act, the learned judge held that the approach indicated
in Lok Shikshana Trust and Indian Chamber of Commerce were correct. He felt that the
previous decisions of the court were not relevant, and that if the activities of a trust involved
any activity for profit or business, the organization ceased to be charitable, and that such
proceeds were utilized for charitable objects, were not relevant. He also noted that “A
reading of Section 2(15) and Section 11 together shows that what is frowned upon is an
activity for profit by a charity established for advancement of an object of general public utility
in the course of accomplishing its objects.” The same judgment also stated that:
“if the object of the trust is advancement of an object of general public utility and it carried on any
activity for profit, it is excluded from the ambit of charitable purpose defined in Section 2(15). The
distinction is clearly brought out by the provision contained in Section 13(1)(bb) inserted by Tax
Laws (Amendment) Act, 1975.”
D. Relevant changes brought about to the IT Act, 1961 (Finance Act, 1983 and 1991)
20. It is pertinent to note that the judgment in Surat Art Silk was delivered on 19.11.1979.
The expression “not involving the carrying on of any activity for profit” in Section 2(15) of the
IT Act, was omitted by the Finance Act, 1983, w.e.f. 01.04.1984. Prior to this, w.e.f.
11
01.04.1977 the following restrictive condition had been inserted18 as clause (bb), to Section
13(1)19:
“(bb) in the case of a charitable trust or institution for the relief of the poor, education or medical
relief, which carries on any business, any income derived from such business, unless the business
is carried on in the course of the actual carrying out of a primary purpose of the trust or institution”
This provision had the effect of excluding or excepting the operation of Section 11 (which
deemed certain receipts of charitable institutions not to be part of their income). The
restrictive condition in clause (bb) was also omitted by the Finance Act, 1983, w.e.f.
01.04.1984.
21. Below Section 11(4)20 (as it originally stood in the IT Act, 1961), Section 11(4A)21 was
inserted by the Finance Act, 1983, w.e.f. 01.04.1984. Subsequently, Section 11(4A) was
amended and substituted by the following provision w.e.f. 01.04.1992 (and continues to be
in force):
“(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in
relation to any income of a trust or an institution, being profits and gains of business, unless the
business is incidental to the attainment of the objectives of the trust or, as the case may be,
institution, and separate books of account are maintained by such trust or institution in respect of
such business.”
E. The judgment in Thanthi Trust
22. This court comprehensively interpreted these provisions as they existed, in different
time periods, in Assistant Commissioner of Income Tax v. Thanthi Trust22 where this court
had to decide whether the assessee trust, created for establishing a newspaper “as an organ
of educated public opinion for the Tamil reading public and to disseminate news and to
ventilate opinion upon all matters of public interest through it.” could avail of tax exemption.
In 1957, the settlor executed a supplementary deed making the trust irrevocable. On
28.07.1961 another supplementary deed was executed which directed that the trust’s
surplus income (after defraying all expenses), should be devoted to purposes such as
establishing and running a school or college for the teaching of journalism; establishing
and/or running or helping to run schools, colleges or other educational institutions for
teaching arts and science; establishing of scholarships for students of journalism, arts and
science; establishing and/or running or helping to run hostels for students; establishing
and/or running or helping to run orphanages; and other educational purposes. The High
Court held that exemption could be claimed by the trust. The revenue appealed. This court
18
Through the Taxation Laws Amendment Act, 1975.
19
Section 13 - Section 11 not to apply in certain cases.
20
Section 11(4) as originally enacted, reads as follows:
“For the purposes of this section ‘property held under trust’ includes a business undertaking so held, and where a claim is made
that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Income Tax
Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to
assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such
excess shall be deemed to be applied to purposes other than charitable or religious purposes.”
21
Earlier, sub-section (4A) was inserted by the Finance Act, 1983, w.e.f. 01.04.1984, and read as follows: “(4A) Sub-section (1)
or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being
profits and gains of business, unless
(a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication
of books or is of a kind notified by the Central Government in this behalf in the Official Gazette;
(b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is
mainly carried on by the beneficiaries of the institution; and separate books of accounts are maintained by the trust or institution
in respect of such business”
22
(2001) 2 SCC 707; (2001) 1 SCR 727.
12
noticed that the appeals covered three distinct periods- (i) 1979-80 to 1983-84, (ii) 1984-85
to 1991-92, and (ii) 1992-93 to 1996-97. This court held that for the first period (1979-80 to
1983-84), the activity of running a newspaper, and the corpus held for it, by the trust, did not
directly result in carrying on the educational activities mentioned in the supplementary
deeds. The income was found to only feed such activity, which was not the same as carrying
on in the course of actual accomplishment of the trust’s objects of education and relief of
poor, and thus not entitled to exemption. For the next period (1984-85 to 1991-92), noting
that Section 11(4) continued to be in existence [despite Section 11(4A) being inserted (as
originally enacted w.e.f. 01.04.1984)], dealing with the expression “property held under
trust”, and held that:
“23....Trusts and institutions are separately dealt with in the Act (Section 11 itself and sections 12, 12A and
13, for example). The expressions refer to entities differently constituted. It is thus clear that the newspaper
business that is carried on by the Trust does not fall within sub-section (4A). The Trust is not only for public
religious purposes so it does not fall within clause (a). It is a Trust not an institution, so it does not fall within
clause (b). It must, therefore, be held that for the assessment years in question the Trust was not entitled to
the exemption contained in section 11 in respect of the income of its newspaper.”
23. For the third period (1992-93 to 1996-97), the court dealt with the meaning and effect
of Section 11(4A) (amended and substituted w.e.f. 01.04.1992) and held that the assessee
trust was entitled to be treated as a charity:
“25. The substituted sub-section (4A) states that the income derived from a business held under
Trust wholly for charitable or religious purposes shall not be included in the total income of the
previous year of the Trust or institution if "the business is incidental to the attainment of the objective
of the Trust or, as the case may be, institution" and separate books of account are maintained in
respect of such business. Clearly, the scope of sub-section (4A) is more beneficial to a Trust or
institution than was the scope of subsection (4A) as originally enacted. In fact, it seems to us that
the substituted sub-section (4A) gives Trust or institution a greater benefit than was given by section
13(1)(bb). If the object of Parliament was to give Trusts and institutions no more benefit than that
given by section 13(1)(bb), the language of section 13(1)(bb) would have been employed in the
substituted sub-section (4A). As it stands, all that it requires for the business income of a Trust or
institution to be exempt is that the business should be incidental to the attainment of the objectives
of the Trust or institution. A business whose income is utilized by the Trust or the institution for the
purposes of achieving the objectives of the Trust or the institution is, surely, a business which is
incidental to the attainment of the objectives of the Trust. In any event, if there be any ambiguity in
the language employed, the provision must be construed in a manner that benefits the assessee.
The Trust, therefore, is entitled to the benefit of section 11 for the assessment year 1992-93 and
thereafter. It is, we should add, not in dispute that the income of its newspaper business has been
employed to achieve its objectives of education and relief to the poor and that it has maintained
separate books of account in respect thereof.”
(emphasis supplied)
F. Deletion of certain exemptions: Section 10 (20A) and Section 10 (23)
24. Section 10(20A) had been inserted by the Finance Act, 1970, w.e.f. 01.04.1962; it
exempted certain classes of income earned by housing boards, etc., and before deletion
read as follows:
“(20A) any income of an authority constituted in India by or under any law enacted either for the
purpose of dealing with and satisfying the need for housing accommodation or for the purpose of
planning, development or improvement of cities, towns and villages, or for both;”
13
25. Similarly, Section 10(23)23 existed and provided exemption to income earned by sport
controlling boards, and associations, subject to specific conditions. Section 10(23) read as
follows, before its deletion:
“(23) any income of an association or institution established in India which may be notified by the
Central Government in the Official Gazette having regard to the fact that the association or institution
has as its object the control, supervision, regulation or encouragement in India of the games of
cricket, hockey, football, tennis or such other games or sports as the Central Government may, by
notification in the Official Gazette, specify in this behalf:”
26. Section 10(20A) and 10(23) were deleted/omitted by Finance Act, 2002, w.e.f.
01.04.2003. While both these provisions are not directly relevant for deciding the primary
question (i.e., as to what charitable purpose is, under Section 2 (15)), they still have an
important bearing in the present case. This is because in view of the circumstances that the
provisions were deleted w.e.f. 01.04.2003, housing boards, and bodies, as well as sports
associations, that were earlier claiming exemption of their income under these provisions,
now sought to claim that they were charities.
G. Amendments to Section 2 (15) by Finance Act, 2008 (w.e.f. 01.04.2009)
27. Section 2(15) - which had been amended last, in 198324, was again amended, by
Finance Act, 2008, w.e.f. 01.04.2009. Some other amendments too were made, with effect
from the same date by the Finance Act, 2009 and Finance Act, 2010. With the said
amendments, as on 01.04.2009, the provision read as follows:
(15) “charitable purpose” includes relief of the poor, education, medical relief, [preservation
of environment (including watersheds, forests and wildlife) and preservation of monuments
or places or objects of artistic or historic interest, and the advancement of any other object
of general public utility:
Provided that the advancement of any other object of general public utility shall not be a
charitable purpose, if it involves the carrying on of any activity in the nature of trade,
commerce or business, or any activity of rendering any service in relation to any trade,
commerce or business, for a cess or fee or any other consideration, irrespective of the nature
of use or application, or retention, of the income from such activity:]”
[Provided further that the first proviso shall not apply if the aggregate value of the receipts
from the activities referred to therein is [ten lakh rupees] or less in the previous year;]
In the second proviso, the reference to ten lakhs was substituted, and the figure of rupees
twenty-five lakhs, was inserted, by the Finance Act, 2011 (w.e.f. 01.04.2012). By Finance
Act, 2015 (w.e.f. 01.04.2016), the first two provisos to Section 2(15) were deleted, and
instead, the following proviso was inserted:
“Provided that the advancement of any other object of general public utility shall not be a
charitable purpose, if it involves the carrying on of any activity in the nature of trade,
commerce or business, or any activity of rendering any service in relation to any trade,
23
As amended by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 01.04.1989; Direct Tax Laws (Amendment) Act, 1989,
w.e.f. 01.04.1989; substituted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 01.04.1990; and further amended by the
Finance (No. 2) Act, 1991, w.r.e.f. 01.04.1990; Finance Act, 1992, w.r.e.f. 01.04.1990/w.e.f. 01.04.1992; and Finance Act, 2000,
w.e.f. 1-4-2001.
24
Deletion of the expression “not involving the carrying on of any activity for profit” and the resulting Section 2(15) read as
follows:
““charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other object of general
public utility.”
14
of use or application, or retention, of the income from such activity, unless—
(i) such activity is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not
exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity
or activities, of that previous year;”
Additionally, the same amendment also inserted “yoga” (after “education”) as a listed
category of charitable activity, in the substantive provision.
II. Submissions of parties
A. Arguments on behalf of the revenue
28. The learned Additional Solicitor General, Mr. N. Venkataraman (hereafter “ASG”)
tracing the genesis of Section 2(15) contended that the old IT Act contained no restrictive
expressions forbidding trade or business activities by charities. He argued that decisions in
In Re: Trustees of the Tribune, Andhra Chamber of Commerce and the decision in Krishna
Warriar (supra) were in light of Section 4(3) of the old Act; therefore, the contextual
framework of this court’s decisions was entirely different. Those decisions consequently did
not rule out carrying on of activities akin to business, by charitable institutions established to
advance general public utility.
29. The ASG next submitted that Parliament’s intent, in changing the law, was to
expressly forbid the tax exemption benefit if the entity was “involved” in carrying on trade or
business. The revenue relied on the two decisions in Lok Shikshana Trust, and Indian
Chamber of Commerce (supra), highlighting that the significance of the change – brought
about by Section 2(15) of the IT Act – was noticed. Particular reliance was placed on the
observations of Beg, J in Lok Shikshana Trust and the passages in Indian Chamber of
Commerce to urge that the involvement of an entity in the carrying on of activities for profit,
even if for advancement of charitable purpose or object, disentitled it to tax exemption. The
learned ASG urged that this court had recognized – from its earlier decisions – that the
prohibition from carrying on trade or commerce activities applied only to charities meant to
advance general public utility and not the other categories such as education, medical relief,
or relief to the poor (which are per se exempt).
30. The ASG submitted that the judgments in Indian Chamber of Commerce and Lok
Shikshana Trust (supra) were conscious of the generality of the GPU category which led
Parliament to insert the restrictive words "not involving the carrying on of any activity for
profit”. It was argued that Parliament amended the definition due to rampant abuse of the
law by businesses claiming to be driven by charitable purposes. Often, charities would be
created merely to secure exemption from tax, and would carry on large commercial activities,
enjoying the profits. This led Parliament to embed the exclusionary terms, depriving
exemption if the institution otherwise fell under the GPU category charity, but undertook
activities for profit. The ASG relied on the Finance Minister's speech in the House at the time
of the introduction of the IT Act, and submitted that it outlines the rationale for the restrictive
condition noting that units run on commercial lines could claim that some general public
utility was promoted and claim exemption. The Select Committee of Parliament (at that time),
felt that to prevent misuse of the definition in such cases, the words “not involving the
carrying on of any activity for profit” should be added to the definition. ASG relied on Lok
15
Shikshana Trust (supra) which highlighted that this statement shed light on the new
provision.
31. It was submitted that Indian Chamber of Commerce (supra) recognized this legislative
history, and also held that the interpretation of the provision had to be in tune with the
advancement of the object of the changed law. The court also was conscious that there were
borderline cases which posed difficulty in deciding ex facie whether the undertaking yielding
profit is a “deceptive” device or a bonafide venture resulting “in nominal surplus although
substantially intended only to advance the charitable object”. The court also held that the
restrictive condition was a “term of art and embraces objects of general public utility”. Yet,
under the garb of charitable purposes, organisations masking profit, sprang up. The mask
was charitable, but the “heart was hunger for tax free profit”. The revenue highlighted the
following reasoning from this court’s judgment in Indian Chamber of Commerce (supra):
“by the new definition the benefit of exclusion from total income is taken away where in
accomplishing a charitable purpose the institution engages itself in activities for profit. The Calcutta
decisions are right in linking; activities for profit with advancement of the object. If you want immunity
from taxation, your means of fulfilling charitable purposes must be unsullied by profit making
ventures.”
32. It was then urged that before the decision in Surat Art Silk (supra) two legislative
developments took place, which reinforced the revenue’s view that charities cannot engage
in commercial activities. The first was the amendment, carried out in 1975 to the IT Act (w.e.f.
01.04.1976), which introduced Section 10 (23C) and had the effect of excluding income
received by inter alia, any fund or institution, established for charitable purposes. The said
provision, to the extent relevant, is extracted as follows:
“10. In computing the total income of a previous year of any person, any income falling within any
of the following clauses shall not be included—
******* ********
“(23C) any income received by any person on behalf of-
(i) the Prime Minister' s National Relief Fund; or
******* ***** *****
(iv) any other fund or institution established for charitable purposes”
The other amendment was introduction of Section 13(1)(bb) (w.e.f. 01.04.1977) which
imposed conditions on the carrying on of business, by charitable institutions.
33. It was urged that the combined operation of Section 2(15), Section 10(23C) and
Section 13(1)(bb) meant that only charities which were set up for the purpose of “relief of the
poor, education or medical relief”, could claim exemption if they carried on business “in the
course of actual carrying out of a primary purpose of the trust or institution”. The studied
omission of GPU category charities, in Section 13(1)(bb) meant that if such trust or
institutions carried on any business, even incidental to their objects, they would not be
entitled to exemption.
34. The ASG then contended that the decision in Surat Art Silk (supra) had the unintended
consequence of ignoring the significance of the addition of the expression “advancement of
any other object of general public utility not involving the carrying on of any activity for profit”.
The remedy intended by Parliament, in adding the said terms was to prevent charities
(involved in the carrying on of any activity for profit) from claiming exemption, and to ensure
that purely charitable activity-driven trusts or institutions, could claim exemption. It was
16
submitted that the Constitution Bench fell into error, in holding that as long as the ‘dominant’
objective of the charity was to promote objects of general public utility, they were entitled to
exemption.
35. The ASG further submitted that if the history of the provision, and the further
amendments were kept in mind, the question of permitting activities that had any business
or trade, for consideration, could not arise; however, by later amendments, GPU category
charities have been permitted to carry on activities in the nature of business, for
consideration, or service in relation to business and commerce, provided that is in the course
of actually achieving the charitable object, and also that income from such activities (i.e.
business, etc.) does not exceed 20% of the total receipts.
36. It was submitted that statutory corporations, agencies, boards and authorities may
trace their origins to specific Central or State laws. However, if their activities are akin to or
“in the nature of” business, or trade, or they provide services to businesses or trade, for
consideration, fee or even cess (since they may be enabled to do so by law) they have to
fulfil the mandate and restrictions under Section 2(15), especially proviso (ii). The ASG cited
the larger bench decision in New Delhi Municipal Council v. State of Punjab25 (hereafter
“NDMC”) to urge that state entities are not exempt from Union taxation, if they engage in
trade or business. It was furthermore submitted that the effect of proviso (i) to Section 2(15)
is that there can be no question of any incidental activity; nor can the proceeds of trade claim
to be exempt merely because they are ploughed back to feed the charitable object.
B. Arguments of the assessee-organizations
37. Mr. S.N. Soparkar, learned Senior Advocate appeared for the Ahmedabad Urban
Development Authority (hereafter “AUDA”); the Gujarat Industrial Development Corporation
(hereafter “GIDC”) and Gujarat Housing Board (hereafter “GHB”). Counsel submitted that all
three corporations were established by or under statutes enacted by the Gujarat legislature;
they were treated as local authority under Section 10(20) of the IT Act, as it existed till 2003.
Thereafter they were treated as charitable institutions engaged in activities involved in the
advancement of public utility till the amendment of 2008. Learned counsel highlighted that
the AUDA was created purely for the development and redevelopment - as well as for
augmentation of roads and allotment of lands after redevelopment, in the areas under its
control. Relying upon the provisions of the Act constituting AUDA26, he submitted that its
mandate is to control development activities, execution of works and dispersal of sewage,
provisions of such other facilities and generally engage in urban development in the areas it
had jurisdiction over. He highlighted Section 40 of that Act and urged that the nature of
activities, especially disposal of properties developed by AUDA were entirely regulated.
Whilst the lion’s shares of properties developed by AUDA were to be allotted for housing
and residence, and earmarked specifically for public amenities, roads etc., a small
percentage (15%) could be sold by public auction. It was submitted that the statutory model
adopted by AUDA was to enable it to function as a self-sustaining unit. The disposal of plots
through allotment and especially by public auction were the main modes through which it
could generate revenue. The entire revenue or income so generated was to be kept in a
fund under Section 91; and its accounts were mandatorily audited by the State’s Accountant
General under Section 95.
25
(1997) 7 SCC 339 (hereafter “NDMC”)
26
Gujarat Town Planning and Urban Development Act, 1976
17
38. It was argued that like AUDA, the GIDC too was also set up by virtue of a statute27,
i.e. GIDA, 1962 for the purposes of securing and assisting rapid and orderly establishment
and organisation of industrial areas and estates in Gujarat, as well as establishing
commercial centres for such industrial areas and estates. Like AUDA, its accounts were
audited by the Accountant General; the audited report was to be laid before the State
legislature (Section 26(4)) and the land developed by the GIDC could be dealt with only in
accordance with law, i.e., the regulations framed under the GIDA, its constituting enactment,
further to Section 32(2). As far as GHB is concerned, learned counsel submitted that like the
other statutory corporations it was also established by virtue of a special law28. The functions
of this Board were identical to that of AUDA and its mandate is to regulate and develop
building activities aimed for the purposes of providing housing.
39. Learned counsel urged that none of the three boards carry on any business activity;
their functions are controlled by the parent enactments under which they were created.
Furthermore, on advancing of its affairs in such a manner that if any surpluses are
generated, they were used for furthering the objectives of law. Thus, for instance, if surplus
is generated in the activities of AUDA, GIDC, or GHB, those would not be handed to the
State Government, which previously had control over them but rather kept in a separate fund
to be utilised for further development, expansion and development activities by each of such
corporations. These cannot be construed as carrying on any trade, business or commerce.
40. It was submitted that the decisions in In Re: Trustees of the Tribune; Krishna Warriar
and Lok Shikshana Trust (supra) were all in the context of entities which carried on business.
Moreover, in the first two decisions, the law as it then stood did not contain any restriction
prohibiting trade or commerce activity. Learned counsel submitted that the judgment in
Indian Chamber of Commerce (supra) was specifically overruled in Surat Art Silk (supra).
Therefore, it may be treated as having no precedential value on subject. Learned counsel
highlighted the observations in Surat Art Silk (supra) and submitted that as long as the
activities involved are mainly charitable and for advancement of public utility, its purposes
are deemed to be charitable even if it carries on some business or trade-like activities for
the purpose of generating income. What is important, it was argued, is whether the main or
dominant purpose of business or activity is motivated by profit. In such cases, the entity is
debarred from claiming that it is a charity and cannot claim the benefit of tax exemption.
Therefore, what is to be understood from the ratio in Surat Art Silk (supra) is that the main
purpose or principal objective or motivation for the activity should not be to carry on trade or
business. It should be to advance the purpose of general public utility. If such a purpose is
fulfilled, the carrying on of some activity which might result in surplus, would not disentitle
the entity from the benefit of tax exemption.
41. Learned counsel then made a brief reference to the judgment in CIT, Bombay v. Bar
Council of Maharashtra29 arguing that Surat Art Silk (supra) was followed in this decision.
He also cited Thanthi Trust (supra). Counsel highlighted that the object of the assessee
there, was charitable and required that the business ought to be carried out for the purposes
of achieving the charitable purpose. Having regard to the nature of Section 13(1)(bb), which
existed for the relevant period, the court held that the income which the trust derived was
through a business and it only fed the charity. In this light, the court rejected the trust’s
contention with respect to the entitlement to claim tax benefit for the first part. Counsel
27
Gujarat Industrial Development Act, 1962 (referred to as “GIDA”)
28
Gujarat Housing Board Act, 1961.
29
(1981) 3 SCC 308 (hereafter “Bar Council of Maharashtra”)
18
pointedly referred to the observations in paragraph 24 of the said decision and submitted
that the court noticed the difference in language brought about by the substitution of Section
11(4A) (w.e.f. 01.04.1992). The new provisions enabled the Trust to carry on business for it
was incidental to the attainment of its activities.
42. Elaborating on Thanthi Trust further, counsel highlighted that the scope of the
provision, i.e. Section 11(4A) had been ruled by this court as more beneficial to the trust or
institution, than had existed previously before its amendment. Therefore, as long as the Trust
carried on its activities mainly for charitable purposes - any income derived from incidental
trading or business activities, would not result in it being characterised as an entity carrying
on business; in other words, it was one carrying on a charitable objective or purpose.
43. Learned counsel also relied upon Circular 11/2008 dated 19.12.2008 which
highlighted that whether the activities carried on by any charitable institutions are in the
nature of trade or whether they are essentially charitable is a question of fact. It also spelt
out that if an assessee is engaged in any activity, in the nature of trade, commerce or
business or rendering any services in relation to such trade etc., it could not claim that its
object was charitable. In such event, “the object of general public utility will only be a means
or defence to highlight the true purpose which is trade, service or business………….”. It was
emphasised therefore that the circular and the speech of the Finance Minister during the
budget clearly pointed out organisations, trust or entities which were masquerading as
charitable but in reality carrying on business. On the other hand, genuine charitable
organisations which generated income for their sustenance could not be denied the benefit
of tax exemption under the Income Tax Act.
44. Counsel relied on the decisions in Shri Ramtanu Cooperative Housing Society Ltd. v.
State of Maharashtra 30 , Gujarat Industrial Development Corporation v. CIT 31 (hereafter
"GIDC case"), HSIDC v. Hari Om Enterprises3233 and Commissioner of Central Excise v.
Maharashtra Industrial Development Corporation33 and urged that statutory organizations
set up for housing and other essential development, cannot be regarded as commercial or
business entities.
45. Learned counsel relied upon the Constitution Bench decision of this Court in Navnit
Lal C. Jhaveri v. K.K. Sen34 (hereafter “Navnit Lal Jhaveri”), where the court had held while
interpreting the provisions of an enactment that the executive’s understanding – in the form
of circulars in the context of taxing statutes – were valuable guides to interpretation. The
observations in Navnit Lal Jhaveri (supra) were relied on to submit that the circulars in that
case was used to in fact soften the rigor of a newly introduced provision. Learned counsel
also relied upon the judgment of this Court in UCO Bank Calcutta v. Commissioner of Income
Tax, West Bengal3536 and in Lok Shikshana Trust (supra) where the Court had specifically
rejected the contention that a speech made in Parliament cannot be looked into to discern
the intent of the lawmaker. In that case, the Court had stressed that the real meaning of all
the words used could be understood specifically by referring to the past history of the
legislation and the speech of the mover of the amendment.
30
(1970) 3 SCC 323
31
1997 (Supp 3) SCR 466; (1997) 7 SCC 17 (hereafter "GIDC case").
32
(2009) 16 SCC 208
33
SCCOnline Bom 10021 (para 10-12)
34
(1965) 1 SCR 909 (hereafter “Navnit Lal Jhaveri”)
35
1999 (4) SCC 599 (hereafter “UCO Bank Calcutta”)
36
SCR (2) 636
19
46. Learned counsel argued that the expressions “trade”, “business” or “commerce”
always mean and have been interpreted to mean activities driven by profit. In this context,
reliance was placed on this court’s decisions in State of Punjab v. Bajaj Electricals Ltd36.;
Khoday Distilleries Ltd. v. State of Karnataka 37 and State of Gujarat v. M/s. Raipur
Manufacturing38. It was submitted that in all contexts, the primary meaning of the expression
“trade” is “exchange of goods” for money and connotates that such activity is necessarily or
always carried on to earn profit. It was, therefore, argued that Section 2(15) cannot be read
in isolation, but should be construed in the light of the minister’s speech while introducing
the amendment, and the Circular (i.e. Circular 11/2018). Therefore, if an organisation is
created and carries on its activities with a view to earn profit as was held in Bajaj Electricals,
Khoday Distilleries, and Raipur Manufacturing (supra), it is precluded from claiming to be a
charitable organisation. On the other hand, if the entity is primarily set up for the charitable
purpose, i.e., to carry on activities for the advancement of general public utility, but it also
carries activities that generate surplus or money, they cannot be per se excluded from
consideration for tax benefit.
47. Learned Senior Counsel Mr. Kavin Gulati argued for NOIDA and relied upon the
Constitution Bench judgment of this court in Commissioner of Central Excise, Bolpur v.
Ratan Melting and Wire Industries3940 to urge that a circular cannot define an ambit of a
provision. He highlighted the decision rendered by the Delhi High Court in Greater Noida
Industrial Development Authority v. Union of India & Ors40, where the assessee’s activities
were held to be not “commercial activity” within the meaning of clause (b) to S.10(46).41 He
also relied on other decisions – of this court, to the same effect, in Kerala State Electricity
Board v. Indian Aluminium Co. Ltd. 42 and Trustees of the Port of Madras v. Aminchand
Pyarelal and Ors.43.
48. Mr. Gulati relied on the GIDC case (supra) to argue that the word “development” in
S.10(20-A) of the IT Act, 1961 has to be understood in its wide sense. It was urged that
development authorities like NOIDA fall under Section 2(15) of the IT Act, 1961 if they satisfy
the test in Section 11(7) of the IT Act, 1961. It was contended that Surat Art Silk (supra) was
clear that engagement by a trust with a commercial activity is not per se prohibited, as long
as its object is the attainment of an object of general public utility. Pointing to the Explanatory
Notes (to the Provisions of the Finance Act, 2015) - with respect to proviso to Section 2(15),
counsel urged that the proviso operates at the stage of registration of trust under Section
12AA(1A) of the IT Act, 1961, when the authorities satisfy themselves with respect to the
genuineness of the activity and scope of the trust.
49. It was lastly argued that the expression “trade” carries within it the idea of profitability:
counsel cited State of Gujarat v. Mahesh Dhiarjlal Thakkar44, Sodan Singh & Ors. v New
Delhi Municipal Committee & Ors45 and T.M.A Pai Foundation and Ors. v. State of Karnataka
37
(1995) 1 SCC 574
38
(1967) 1 SCR 618
39
(2008) 13 SCC 1
40
SccOnline Delhi 7536
41
The High Court had relied upon the ratio in Shri Ramtanu Co-operative Housing Society Limited v. State of
Maharashtra (1970) 3 SCC 323 , which ruled that the true character of the corporation in that case i.e., the Maharashtra
Development Corporation was to act as an architectural agent for the development and growth of industrial towns and for their
establishment.
42
(1976) 1 SCC 466
43
(1976) 3 SCC 167
44
(1980) 2 SCC 322
45
1989 (3) SCR 1038
20
& Ors 46 . Reliance was placed upon the judgment in CIT, Madras v. M/s Madurai Mills
Company Limited 47 to urge that interpretation of the definition of expression “charitable
purpose” should not be coloured by considerations stemming from legislative history, which
override the plain words of a statute.
50. Mr. K. K. Chythanya, senior counsel appeared for M/s Karnataka Industrial Areas
Development Board (“KIADB”). He urged that KIADB was formed under Section 5 of the
Karnataka Industrial Areas Development Act, 1966 (“KIAD Act”) and it functions on “no profit-
no loss” basis as is evident from the preamble48, the aims and objectives49 of the board as
well as Sections 3, 5, 6, 28, 29, 43 and 46 50 of the KIAD Act. Reliance was placed on
Karnataka Industrial Areas Development Board v. Prakash Dal Mill51 which held that KIADB
is “state” under Article 12 of the Constitution, and it was urged that KIADB was an extension
of the Karnataka Government. The board exercises power of eminent domain and it
performs governmental functions. Its activities, therefore, cannot be regarded as trade or
business. Reliance was placed upon State of Karnataka v. All India Manufacturer’s
Organisation52.
51. It was submitted that in the absence of profit motive, the activity is not trade, commerce
or business - within the meaning of first proviso to Section 2(15) of the IT Act, 1961. Reliance
was placed upon Khoday Distilleries (supra), State of Tamil Nadu v. Board of Trustees of
the Port of Madras53 and several other decisions54. It was argued that wherever it is intended,
profit element is wholly excluded from activity - reliance was placed on provisions of the
Karnataka VAT Act, The Central Goods and Service Tax Act (“CGST Act”) and Section 2(31)
of the IT Act. In the present context, the activities of the Board do not amount to “trade”,
“commerce” or “business” and the first proviso to Section 2(15) is attracted only if the
primary/dominant objects are (a) in the nature of trade, commerce or business; or (b)
rendering any service in relation to any trade, commerce or business. To substantiate this
argument, counsel relied on Surat Art Silk (supra), Commissioner of Income Tax v. Gujarat
Maritime Board55 (hereafter “Gujarat Maritime Board case”) and other decisions56. Hence, if
the main activity is not “business”, the connected, incidental or ancillary activities of sales
carried out in furtherance of and to accomplish their main objects would not normally, amount
46
(2002) 8 SCC 481
47
(1973) 4 SCC 194
48
“It is considered necessary to make provision for the orderly establishment and development of Industries in suitable areas in the
State. To achieve this object, it is proposed to specify suitable areas for Industrial Development and establish a Board to develop
such areas and make available lands therein for establishment of Industries.”
49
Promote rapid and orderly development of industries in the state.; Assist in implementation of policies of Government within the
purview of KIAD Act; Facilitate in establishing infrastructure projects: Function on “No Profit – No Loss” basis.
50
• Section 5 – Established and incorporated for securing the establishment of industrial areas in the State of Karnataka and
generally for promoting the rapid and orderly establishment and development of industries and for providing industrial
infrastructual facilities and amenity in industrial areas in the State of Karnataka.
• Section 6 – All the members of the Board are government officials;
• Section 46 - the members & other employees of the Respondent are deemed to be public servants.
• Section 3 & 28 - Government of Karnataka (GOK) that acquires the land from the public.
• Section 29 – GOK determines the price and pays the compensation.
• Section 43 - No duty under the Karnataka Stamp Act, 1957, or fees under the Indian Registration Act, 1908.
51
(2011) 6 SCC 714
52
(2006) 4 SCC 683
53
1999 (2) SCR 195 (hereafter, “Board of Trustees of the Port of Madras”)
54
State of Karnataka v. Shreyas Papers Pvt. Ltd. AIR 2006 SC 865; Ashoka Smokeless Coal India (P) Ltd. v. Union Of India
(2007) 2 SCC 640; New Delhi Municipal Committee v. State of Punjab 1996 Supp 10 SCR 472; and Physical Research Laboratory
v. K.G Sharma 1997 (3) SCR 733.
55
2007 (12) SCR 962; (2007) 14 SCC 704 (hereafter “Gujarat Maritime Board case”).
56
Yogiraj Charity Trust v. CIT 1976 (3) SCR 947; Commissioner of Income Tax v. Andhra Pradesh Road Transport
Corporation 1986 (1) SCR 570; Queens’s Educational Society v. CIT 2015 (8) SCC 47.
21
to business, unless an independent intention to conduct ‘business’ in these connected,
incidental or ancillary activities is established by the revenue. The judgments in CST v. Sai
Publication Fund57 and the Board of Trustees of the Port of Madras (supra) was relied upon.
It was urged that the revenue’s contention that statutory authorities’ claim for exemption is
confined to the provision in Section 10(46). He urged that in terms of Section 11(7)58 the
Board has an option to claim exemption either under Section 11 or under Section 10(46).
There is no bar for claiming exemption under either of those provisions.
52. Mr. Dhruv Agrawal, learned senior counsel appearing for the U.P Awas Evam Vikas
Parishad adopted the submissions of senior counsel Mr. Soparkar and K.K Chythyanya. He
also urged that the realization of the right to shelter and housing is an integral part of right
to life, and contended that the predominant activity of the assessee involves the fulfilment of
those objectives, especially for the weak and poorer sections of the society. He relied on this
court’s decision in Chameli Singh v. State of U.P & Ors.59 which had stated that right to social
justice includes right to shelter, and that these statutory corporations are the means to
ensure that.
53. Mr. K. V. Viswanathan, senior counsel appearing on behalf of GS1 India submitted
that the assessee is involved in issuing bar codes which is a global language of standardised
coding and the is a universally accepted standard for identification of products. The GS1
barcode is a global standard which is an intellectual property of GS1 (an international non-
profit organisation headquartered at Brussels) and it has affiliates in each country with the
assistance of national governments. GS1 India the assessee, is an affiliate; it was registered
as a society in the year 1996, with the Joint Secretary-Ministry of Commerce as its President
and the administrative control vests with the Ministry of Commerce, Government of India. It
was registered as a charitable GPU category society in 1996. All the trade bodies60 as well
Bureau of Indian Standards are members of its governing council.
54. It was submitted that the revenue had granted exemptions to the assessee society
under Section 12A and Section 10(23C)(iv) while issuing various certificates from time to
time (from AY 1996-1997 to 2007-2008); therefore, it had accepted that the assessee’s
object and purpose was charitable, i.e., advancement of general public utility. Also, to reflect
that there is no business/trade/commerce involved and profit motive is absent the learned
counsel relied upon the decision of the assessee society to issue substantial discounts to
the extent of 50% to deserving sectors like cottage industries to enable augmentation of
market for such sectors, as well as the letter written by CEOGS1 to the President GS1 (i.e.
Joint Secretary, Ministry of Commerce) to permit reduction of fee from ₹400 too ₹70 per
farm/plot, for issuing Global Location Number (GLN) to farmers, which was approved.
55. Regarding the statutory provisions it was submitted that the words “trade, commerce
or business” in the proviso to Section 2(15) of the IT Act cannot be read in isolation and have
to be seen in context of “charitable purpose” and, even after a series of amendments - from
the Finance Act, 2008 to Finance Act, 2015 there is essentially, no change in the basis of
57
2002 (2) SCR 743
58
Inserted by Finance (2) Act, 2014 and amended by Finance Act, 2020
59
(1996) 2 SCC 549. The court had cited Article 25(1) of the Universal Declaration of Human Rights and Article 11(1) of the
International Covenant on Economic, Social and Cultural Rights, 1966 and relied on Sri. P.G. Gupta v. State of Gujarat & Ors.
1995 (1) SCALE 653 - where a Bench of three Judges of this Court had considered the mandate of the human right to shelter and
read it into Article 19(1)(e) and Article 21 of the Constitution of India to guarantee the right to residence and settlement.
60
Federation of Chambers of Indian Commerce and Industry; Confederation of Indian Industry; Associated Chambers of
Commerce and Industry of India (ASSOCHAM); The Agricultural and Processed Food Products Export Development Authority
(APEDA).
22
determination of what amounts to a trade, commerce or business and therefore the tests as
laid down in Surat Art Silk (supra) still holds the field to interpret these words.
56. Counsel urged that Parliament is assumed to have used the word ‘involves’ found in
proviso to Section 2(15) as interpreted in Surat Art Silk (supra), in the sense that an activity
is involved in the advancement of an object when it is enwrapped or enveloped in the activity
of advancement, so that the resulting activity has a dual nature or is twin faceted. The well-
known principle of construction, that where the legislature uses in an Act, a legal term which
has received judicial interpretation, it must be assumed that the term is used in the sense in
which it has been judicially interpreted unless a contrary intention appears, was relied upon,
and the decision in P. Vajravelu Mudaliar v. Special Deputy Collector, Madras & Ors.61 was
cited in that context.
57. Countering the contentions of the revenue that if entities making profit but not involved
in commercial activity desire exemption, they ought to apply under Section 10(46) IT Act, it
was submitted that the expression “constituted by or under an Act” in Section 10(46) does
not include all entities like the assessee, which is a not a statutory corporation, but a “not for
profit” society registered under the Societies Act. It was argued that the distinction between
“established by and under an Act” is well settled and includes entities which are statutory
corporations as contrasted from non-statutory ones. The judgment in Dalco Engineering Pvt.
Ltd. v. Satish Prabhakar Padhye & Ors.62 was referred to, in this context where this court
ruled that
“…when the words "by and under an Act" are preceded by the words "established", it is clear that
the reference is to a corporation established, that it is brought into existence, by an Act or under an
Act. In short, the term refers to a statutory corporation as contrasted from a non-statutory corporation
incorporated or registered under the Companies Act.”
58. Learned senior counsel lastly submitted that an activity, to be “trade, commerce or
business”, must be profit driven. Profit motive is a quintessential element and an activity
without profit motive will not result in “trade, commerce or business” in terms of the decision
in State of A.P v. H. Abdul Bakhi & Bros63. If exemption is not granted to the assessee it will
face a liability of around ₹300 crore (from FY-2007-08 to 2020-21), which given its financial
condition will jeopardise its existence and functioning.
59. Ms. Radhika Suri, learned counsel argued on behalf of Bhatinda Improvement Trust
and adopted the submissions of Mr. Soparkar. She urged, in addition, that it is obligatory on
part of the assessee (a statutory corporation) to use the monies received for public utility
purpose and the price fixation of lands/plots sold by them is also regulated through statutory
regulations. Therefore, such activities qualify the test of general public utility. Ms. Suri also
relied on the decision of the Delhi High Court in Greater Noida Industrial Development
Authority (supra) to the effect that there is need to distinguish commercial activity which
constitutes disqualification under clause (b) to Section 10(46) of the Act, and charging and
payment of fee, service charges, reimbursement of costs or consideration for transfer of
rights for performing and undertaking regulatory or administrative duties for general public
interest, when these are not guided and undertaken with profit motive or intent. Further,
reliance was placed on The Commissioner of Income Tax (Exemptions), Chandigarh v. M/s
Hoshiarpur Improvement Trust, Hoshiarpur64 to explain the characteristics of the assessee.
61
1965 (1) SCR 614
62
(2010) 4 SCC 378
63
1964 (7) SCR 664
64
ITA No. 78 of 2016
23
Learned counsel further laid emphasis on provisions of the regulations under the Punjab
Improvement Trust Rules and regulations to show the procedure adopted by the board in
fixing prices.
60. Mr. Gursharan S. Virk, argued that the Gujarat Maritime Board (GMB), is a statutory
one, constituted under Section 3(2)65 of the Gujarat Maritime Board Act, 1981 (GMB Act); it
performs functions which, prior to the enactment of the Act, were being performed directly
by the State Government 66 . The Preamble to the Act notes that it is constituted for
administration, control and management of minor ports in the State of Gujarat, and for all
matters connected therewith. The Board’s powers under the GMB Act apply to works carried
out by GMB as conservator of ports under the provisions of the Indian Ports Act67; it is
charged with essential functions such as development and upkeep of jetties, wharves,
docks, piers, places of anchorage, light-houses, light-ships, beacons, buoys, pilot boats, and
other appliances necessary for safe maritime navigation, etc. and for development of minor
ports in general 68 . It is also entitled to undertake essential maritime services such as
stevedoring, landing, shipping or trans-shipping, piloting, hauling, mooring and hooking
vessels/goods, etc.69 Hence it was urged, that GMB’s functions are, essential and sovereign
in nature, and relate to the development, safety and protection of the waterfront.
61. It was submitted that the GMB is not engaged in any business or trade, is not engaged
in any activity which generates profit and does not (also statutorily cannot) use money for
anything except for development of minor ports in the state of Gujarat and the features of
the GMB Act. These features in context of the controversy at hand, under the provisions of
the IT Act, were considered by this court in the Gujarat Maritime Board case (supra). The
decision discussed Sections 73, 74 & 75 of the GMB Act, which provide for management of
all monies received by the GMB; and Section 76 of the GMB Act, which permits the setting
aside of surplus money only for “expanding existing facilities or creating new facilities at the
ports” or for meeting with contingencies caused on account of “fire, cyclones, shipwrecks or
other accidents or for any other emergency.” It was stressed that that judgment clearly
indicates GMB has no profit motive. It was therefore, urged that the provisions of the GMB
Act, indicate the overwhelming public purpose carried out by it without profit motive and that
utilization of funds is only for the purpose of development, management and safety of minor
ports; all these entitles GMB to exemption.
62. Mr. Rohit Jain, learned counsel, appeared on behalf of the Education and Research
Network (ERNET) and National Internet Exchange of India (NIXI). On behalf of ERNET it
was submitted that it was started as a planned project of the Government of India under the
Department of Electronics (DoE) with the support of the United Nations Development
Program (UNDP). The program was focused on integrating information technology and
internet tools with learning environment, to enhance the quality of education. However,
funding by the UNDP ended in 1992. The DoE nevertheless continued to support the project
till 1998 and thereafter the body was registered as an autonomous society under
administrative control of the Ministry of Communication and Information Technology, Govt.
of India on 27.01.1998. It was registered under Section 12A of the IT Act, 1961 on
65
Section 3 (2):- “ The board shall be a body corporate by the name aforesaid having perpetual succession and a common seal
with power, subject to the provisions of this Act to acquire, hold and dispose of property, both movable and immovable, and to
contract, and may by the said name sue and be sued.”
66
Section 20 of the GMB Act
67
Section 83 of the GMB Act
68
Section 25(2) of the GMB Act
69
Section 32 r/w Sections 37-30 of the GMB Act
24
26.03.2004 and its activities fell within the meaning of “charitable purpose” under Section
2(15). It duly complied with Sections 11 and 12 of the IT Act, 1961.
63. NIXI was created in 2003 by the Government of India under the Ministry of Information
Technology, for promotion and growth of internet services in India, regulating the internet
traffic and acting as internet exchange, to undertake “.in” domain name registration thereby
saving valuable foreign exchange, and take care of national concern. It was urged that this
is a Section 25 company barred from undertaking any commercial or business activity for
profit and is bound by strict licensing conditions, including prohibition on alteration in the
memorandum of association, without prior consent of the government. The “charitable”
nature of the same has also been upheld under Section 12A of the IT Act, 1961.
64. Learned counsel submitted that ERNET is a “not for profit” society wherein considering
its objects, it receives only subscription fees mainly from schools, colleges, universities,
scientific research institutes, etc. This subscription fees is charged on “actual basis” and
utilized towards promotion of its objectives. The charitable character of the assessee is
apparent and not in dispute since it has been accepted by the revenue up to AY 2008-09.
Also, the final factual findings recorded by lower authorities conclusively demonstrate that
the assessee is engaged in ‘advancement of general public utility’, and qualifies as a
‘charitable purpose’ as it does not carry any trade commerce or business, and the income
earned is not derived in the course of any commercial activity.
65. Learned counsel also submitted that the assessee carries on R&D work which enables
educational institutions with Information and Communication Technology infrastructure for
making education reach the public at large solely for charitable purpose and further reliance
was placed upon ICAI Accounting Research Foundation v. DGIT(E) 70 , Bureau of Indian
Standards v. DGIT(E)71 and GS1 India v. DGIT(E)72.
66. Mr. Ajay Vohra, learned senior counsel, appearing for the Apparel Export Promotion
Council (AEPC) urged that it is a non-profit organization set up with approval of the Central
Government, for promotion of exports of garments from India (i.e., promotion of trade). It
was registered under Section 12AA(1) of the IT Act, on 18.05.1979 and is engaged in the
activity of promotion of the export of all kind of ready-made garments, knitwear, and
garments made of leather, jute and hemp. It does not per se engage in any activity for profit,
and its mandate is to ensure that Indian apparel manufacturers, are given forums and
platforms, to showcase their products. For that purpose, the AEPC charges subscriptions,
and provides services, which have general public utility. These activities are by way of
booking large spaces in fairs, and such like events, especially in overseas locales, so that
Indian manufacturers can interact with other overseas buyers, and are enabled to promote
trade. It was submitted that there is ex-officio involvement on behalf of the Central
Government, in the AEPC’s activities, including in its policy formulation levels.
67. Mr. Vohra relied upon the Memo Explaining Provisions in the Finance Bill, 200873, the
speech of Finance Minister in Lok Sabha on Finance Bill, 200874, CBDT Circular No. 11
dated 19/12/200875 to submit that proviso to Section 2(15) only bars commercial/business
activities undertaken for profit motive. It was submitted that mere earning of income and/or
70
321 ITR 73 (Del)
71
358 ITR 78 (Del)
72
360 ITR 138 (Del)
73
ITR (St.)
74
Quoted in ITPO v. DGIT(E) : 371 ITR 333 (Del) (hereafter “ITPO”)
75
967 (3) SCR 778
25
charging any fees is not barred by the proviso; rather, carrying of any activity in the nature
of trade, commerce or business or rendering service in relation thereto is barred. Reliance
was placed upon judgments in Dir. Of Supp. & Disp. v. Board of Revenue76 which follows H.
Abdul Bakhi & Bros (supra), Barendra Prasad Ray v. ITO77 and State of Gujarat v. Raipur
Manufacturing Co. Ltd.78 to argue that in “business” there must be some real and systematic,
or organized course of activity or conduct with the set purpose of making profit. Counsel
referred to Sai Publication Fund (supra) where this court observed that since primary and
dominant activity of the trust was to spread message of Saibaba and hence not business,
then any incidental or ancillary activity of publishing and selling of books and literature cannot
be regarded as business. Reference was made to Customs & Excise Commissioner v. Lord
Fisher79 which held that there are six indicia to determining business namely (a) serious
undertaking earnestly pursued, (b) reasonable continuity, (c) substantial in amount, (d)
conducted regularly on business principles, (e) predominantly concerned with making
taxable supplies for consideration, (f) such as those commonly made by persons seeking to
make profit. Other judgments too were cited; and reference was made to definitions in the
Concise Oxford Dictionary, Webster’s New Twentieth Century Dictionary, Black’s Law
Dictionary, and Sampath Iyengar’s Law of Income Tax.
68. Mr. Ajay Vohra, urged that AEPC has been claiming exemption under Section 11 from
AY 1979-80 to 1990-91. During AY 1991-92, the Assessing Officer (“AO”) denied the
exemption on the ground that it was carrying on business. That order was eventually set
aside by the ITAT which, held that it was entitled to exemption under Section 11 of the Act.
Subsequently, an amendment was brought to Section 11(4A) and AEPC had to maintain
separate books of accounts. In AY 1992-93, the AO again denied exemption. On appeal,
the issue was decided in favour of AEPC by the ITAT. The Delhi High Court upheld the order
of the ITAT in a judgment80. AEPC received entrance fee and membership fee which, it
claimed were exempt on the principle of mutuality. This issue too was resolved in its favour
from the AY 1992-93 to AY 1997-98 by the jurisdictional High Court. From the assessment
year 1998-99 to the assessment year 2008-09, the AO accepted the assessee’s claim that
income was exempt under Section 11 of the Act.
69. During AY 2009-10 and 2010-11, the AO denied exemption under Section 11 on the
ground that the newly inserted proviso to Section 2(15) was attracted; and thus the assessee
was ineligible for exemption under Section 11. The AO held that the assessee was rendering
services in relation to trade, commerce business for consideration and the receipt of which
exceeds ₹10 lakhs. The CIT(A) allowed the assessee’s appeal following the decision of the
High Court in its case, and there being no changes in the facts and circumstances of the
case. The ITAT upheld the findings of the first appellate authority as it observed that the
assessee did not carry any activity with an object of profit, and thus the question of attracting
the proviso did not arise.
70. Ms. Prabha Swami, learned counsel submitted that the A.P State Seed Certification
Agency is a statutory society set up under Section 8 81 of the Seeds Act, 1966 which is
represented by the representatives of Seedsmen Association, seed farmers, farming
76
ITR (St.)
77
1981 (3) SCR 387
78
1967 (1) SCR 618
79
(1981) 2 All ER 147
80
Reported at 244 ITR 736
81
“Section 8. The State Government or the Central Government in consultation with the State Government may, by notification in
the Official Gazette, establish a certification agency for the State to carry out the functions entrusted to the certification agency
by or under this Act”.
26
community and members representing Central Seed Certification Board. While explaining
the charitable characteristic of the society the counsel pointed out that the society was duly
registered and its Memorandum of Association clearly inter-alia stated that the object for
which it was established was to see that the cultivators adopt all scientific methods for
production of quality seeds in accordance with the Seeds Act and to carry on educational
programs designed to promote the use of certified seeds. Charges are collected from the
traders or the societies engaged in the trade of seeds. The society provides quality seeds to
the farmers and hence traders are prevented from selling inferior variety of seeds.
Highlighting the activities of the authority, it was urged that farmers are benefited by various
services it offers - inspection of fields at the time of seed production, supervision while
processing seeds and issuing a validation certificate at the time of packing, sampling, and
seed testing. The society (which is not involved in trade, commerce or business) is therefore
rendering service to the general public as they are encouraging farmers to purchase quality
seeds and help prevent loss to them, and loss of natural resources. Mr. Sanjay Jhawar,
learned counsel for Rajasthan State Seed Corporation also adopted the submissions of Ms.
Prabha Swami.
71. Mr. Sanjay Visen, learned counsel argued on behalf of M/s Raebareli Development
Authority, Raebareli, urging that the assessee is a body constituted under the U.P Urban
Planning and Development Act, 1973. As their activities were aimed at public purpose, it
applied for registration u/s 12AA of the IT Act, 1961. It was submitted that the assessee’s
income was earlier exempted under Section 10(20A) of the IT Act, 1961 which was omitted
by the Finance Act, 2002; however, this did not restrict the assessee from getting registered
under Section 12AA of IT Act, as the object of the authority is to provide shelter to homeless
people, which is charitable.
72. Mr. Harish Salve, learned senior counsel appearing on behalf of Saurashtra Cricket
Association drew attention of this court towards the ambit of Section 4(3) of Income Tax Act,
1922 (i.e., the old Act), as compared to Section 2(15) of the IT Act, 1961 which defines
‘charitable purpose’. He also presented the construction of Section 11 in light of Thanthi
Trust (supra). It was emphasized that the objects of a trust are decisive and every surplus
cannot be construed as profit, as is discussed in Krishna Warriar (supra). Profits from trade
or business arising out of property held under trust for charitable purpose, if ploughed back
to the extent of 100% cannot be termed as a commercial activity. This was the principal idea
in omitting Section13(1)(bb) as it was considered as restrictive for carrying out such
activities. It was argued that, substitution of the definition of “charitable purpose” in Section
2(15) by the Finance Act, 2008 has not changed the law. The words “in relation to any trade,
commerce or business” and “for a cess, fee or consideration” in the proviso to Section 2(15)
implies that advancement of object of a trust may not involve activities of profit. It was urged
that the amendment appears to have undermined this court’s decision in Surat Art Silk
(supra).
73. It was argued that the crucial part of the definition of “charitable purpose” is the word
“cess” employed in the proviso. As an explanatory measure, the activities of promotional
councils were taken into consideration - for example Surat Art Silk supported silk
manufacturers. If such activity is for a cess or a fee, the organization ceases to be charitable.
Activities in the nature of trade, commerce or business are not charitable if they are for a fee
or other consideration. Fees collected by the private organizations forms the content of
Section 2(15). However, amounts based on tariff regulations imposed by the controlling law,
or statute-based fee is neither “fee” nor “cess” under that provision. Further, the
consideration involved is vis-à-vis the activity or service. The test is the object for which the
27
consideration is paid, and what it entails, wherein the words “any other consideration” is for
the activities in aid or service of business. In this regard it was submitted that, in true sense
the word “business” implies profit, however statutory organizations are excluded from its
ambit. Fee or consideration collected by such organizations should not be taken in the sense
of profiteering, as it is for the advancement of their objectives. In this sense the word “cess”
can be read down as non-statutory.
74. It was submitted that the phrase “cess, fee or any other consideration” in the proviso
to Section 2(15) covers the second part of the proviso, i.e., it is relatable to “service in relation
to” trade, commerce or business. Mr. Salve submitted that any statutory cess, or fee,
authorized or compelled by law, which is within the domain of the state legislature, cannot
be construed as taxable, having regard to the principles indicated in the judgment of this
court, in NDMC (supra). He relied on Article 289 of the Constitution of India, and submitted
that it is only if a state engages – by itself, or through an agency, directly in trading activity,
that the immunity from Union taxation is lifted. In the present case, those agencies set up by
the State, essentially through law, to carry out welfare activities, such as regulation and
housing, cannot per se be characterized as trading concerns.
75. Mr. Salve submitted that cricket associations are operating purely to advance their
objective of promoting the sport. They should not be considered as pursing activities in
furtherance of trade, commerce or business. The word “cess” has to be read down in reverse
(reverse ejusdem generis) and it should be read non-statutorily while adopting purposive
interpretation of the same. Reliance was placed on Nabha Power Limited v. Punjab SPCL82
to state that a purposive interpretation of “cess”, is to be adopted.
76. It was also argued that the sport of cricket is a form of education and if it is not
considered as a field of education, it is still an object of general public utility. The primary
regulating body i.e., the BCCI, promotes sport in the entire country and worldwide, and the
assessees herein are its second and third tier associations. The revenue generated by BCCI
flows to state and regional cricket associations in the form of grants to maintain stadia,
conduct matches, organize training camps, and other ancillary purposes. Counsel relied on
the objects of Saurashtra Cricket Association which inter alia include, the control,
supervision, regulation, encouragement, promotion and development of the game of cricket
in the Association’s jurisdiction. Other objects include creation, fostering friendly
relationships through sports tournaments and the creation of a healthy sportsmanship spirit,
through the medium of sports in general and cricket in particular. All other objects were
similar, including “to arrange, and/or manage among other things league and/or any other
tournaments”; organize matches, lay out grounds for playing cricket, organization of matches
in aid of public charities, etc. If these associations sell tickets and generate revenue through
other activities, those do not necessarily mean that their objects are commercial or to
promote trade. Selling tickets for a sport performance or match is to promote cricket, and
not trade. Mr. Salve also urged that the expression “trade” has a particular meaning; he
referred to State of Gujarat v. Maheshkumar Dhirajal Thakkar83 where the court observed
that “the word trade in its narrow popular sense means ‘exchange of goods for goods or for
money with the object of making profit’. In its widest sense it includes any business carried
on with a view to earn profit84. Further, the word takes its meaning from the context.”
82
(2018) 11 SCC 508
83
(1980) 2 SCC 322
84
Halsbury’s Laws of England, Vol. 32 para 487
28
77. Likewise, with regard to “business” the counsel referred to H. Abdul Bakhi & Bros.
(supra) which had discussed the term and explained that any activity should be driven by
profit motive. 85 Lastly, the judgment in Secretary, Ministry of Education & Broadcasting,
Govt. of India & Ors. v. Cricket Association of Bengal86 was cited to explain the dominant
purpose of the BCCI. That judgment highlighted what is relevant and applicable is the test
of predominant character of the activity, and not that an institution incidentally earns surplus
or profit.
78. Mr. Arvind Datar, learned senior counsel appeared on behalf of the Institute of
Chartered Accountants of India (hereafter “ICAI”) as well as The Tribune Trust.
79. Counsel submitted that ICAI is a premier professional accountancy body of the country
established under the Chartered Accountants Act, 1949 (“CA Act”) to impart formal and
quality education in accounting and thereafter to regulate the profession of Chartered
Accountancy in India. It is under the control and supervision of the Ministry of Corporate
Affairs, Government of India. Section 1587 of the CA Act defines the functions of Council of
Institute which include holding of examinations for chartered accountancy course candidates
and regulation of engagement and training of articled clerks and audit assistants.
80. It was submitted that holding of coaching and revision classes, and surplus generated
due to the fees collected from that activity is not a business or commercial activity. Counsel
urged that it is wholly incidental and ancillary to the objects of the institute - which is to
provide education and conduct examinations of the candidates enrolled for chartered
accountancy courses, so as to bring out true professionalism. Therefore, separate books of
85
“the expression ‘business’ though extensively used is a word of indefinite import, in taxing statutes it is used in the sense of an
occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To
regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a
profit motive, and not for sport or pleasure. But to be a dealer a person need not follow the activity of buying, selling and supplying
the same commodity. Mere buying for personal consumption i.e. without a profit motive will not make a person a dealer within the
meaning of the Act, but a person who consumes a commodity bought by him in the course of his trade, or use in manufacturing
another commodity for sale, would be regarded as a dealer”.
86
(1995) 2 SCC 161
87
15. Functions of Council (1) The Institute shall function under the overall control, guidance and supervision of the Council and
the duty of carrying out the provisions of this Act shall be vested in the Council.
(2) In particular, and without prejudice to the generality of the foregoing powers, the duties of the Council shall include –
(a) to approve academic courses and their contents;
(b) the examination of candidates for enrolment and the prescribing of fees therefor;
(c) the regulation of the engagement and training of articled and audit assistants;
(d) the prescribing of qualifications for entry in the Register;
(e) the recognition of foreign qualifications and training for the purposes of enrolment;
(f) the granting or refusal of certificates of practice under this Act;
(g) the maintenance and publication of a Register of persons qualified to practice as chartered accountants;
(h) the levy and collection of fees from members, examinees and other persons;
(i) subject to the orders of the appropriate authorities under the Act, the removal of names from the Register and the restoration
to the Register of names which have been removed;
(j) the regulation and maintenance of the status and standard of professional qualifications of members of the
Institute;
(k) the carrying out, by granting financial assistance to persons other than members of the Council or in any other manner, of
research in accountancy;
(l) the maintenance of a library and publication of books and periodicals relating to accountancy;
(m) to enable functioning of the Director (Discipline), the Board of Discipline, the Disciplinary Committee and the Appellate
Authority constituted under the provisions of this Act;
(n) to enable functioning of the Quality Review Board;
(o) consideration of the recommendations of the Quality Review Board made under clause (a) of Section 28B and the details
of action taken thereon in its annual report; and
(p) to ensure the functioning of the Institute in accordance with the provisions of this Act and in performance of other statutory
duties as may be entrusted to the Institute from time to time.
29
accounts are not required to be maintained in terms of Section 11(4A) read with the fifth and
seventh proviso to Section 10(23C) of IT Act, 1961. It was urged that ICAI was not hit by the
proviso to Section 2(15) of the IT Act (inserted w.e.f. 01.04.2009) since its activities fall within
the purview of the clause “education” specified in the definition of the expression “charitable
purpose” in S. 2(15) of the said Act, and not the residuary clause relating to the GPU
category, wherein the proviso solely applies to the latter. In this regard the counsel referred
to the Gujarat High Court judgment in Saurashtra Education Foundation v. CIT88 which took
into account the observations made in another judgment by the same High Court in Gujarat
State Co-operative Union v. CIT89, to hold that the ICAI was existing solely for educational
purposes and its activities clearly fall within the category of ‘education’ in Section 2(15) of
the Act. In further support of this proposition, reliance was placed on American Hotel and
Lodging Association v. CBDT90 to argue that ICAI is entitled to be notified under Section
10(23C)(iv) r/w Section 2(15) of the Act, 1961.
81. Counsel submitted that profit motive is an essential element, or the driving force, for
any business or commercial activity. The activities of ICAI are not of such nature. Counsel
relied upon the judgment in NDMC (supra) which ruled that profit motive is the core aspect
of trade and business, in the context of Article 289 of the Constitution of India, which talks
about exemption of property and income of a state from Union Taxation.
82. It was argued that there is a distinction between nature of commercial ventures and
charitable institutions such as ICAI. The word ‘profit’ should never be used with a body set
up for public purposes, to regulate activities, in public interest and the intent of the
organization/establishment must be taken into consideration. In support, Board of Trustees
of the Port of Madras (supra) was cited, where the Port trust’s activities included sale of
unclaimed and unserviceable goods in discharge of various statutory charges, items, etc.
They were part of the Port Trust’s main activities of service. The court said that they cannot
be treated as ‘business’ and that the Port Trust had no intention to carry on business in the
sale of unserviceable/unclaimed goods. Reliance was placed on Surat Art Silk (supra),
Andhra Pradesh State Road Transport Corporation (supra), Victoria Technical Institute v
CIT91, Aditnar Educational Institution v. Addl. CIT92, Thiagarajar Charities v. ACIT93, Director
of Income Tax v. Bharat Diamond Bourse94 and Gujarat Maritime Board case (supra). The
observations in T.M.A Pai (supra) that there can be reasonable revenue surplus, by the
educational institution for the purpose of development of education and expansion of the
institution, was also referred to.
83. Learned senior counsel further relied on the explanatory notes to the provisions of the
Finance Act, 2008, specifically towards amendment made to Section 2(15) of the IT Act,
aimed at streamlining the definition of “charitable purpose” as discussed in para 595 and the
88
(2005) 273 ITR 139 (Guj.)
89
(1992) 195 ITR 279 (Guj.)
90
(2008) 10 SCC 509
91
(1991) 188 ITR 57 (SC)
92
(1997) 3 SCC 346
93
(1997) 4 SCC 724
94
(2003) 259 ITR 280 (SC)
95
5. Streamlining the definition of “charitable purpose”
5.1 Sub-section (15) of section 2 of the Act defines “charitable purpose” to include relief of the poor, education, medical relief, and
the advancement of any other object of general public utility. This is based on the argument that they are engaged in the
“advancement of an object of general public utility” as is included in the fourth limb of the current 12 It has been noticed that a
number of entities operating on commercial lines are claiming exemption on their income either under sub-section
(23C) of section 10 or section 11 of the Act on the ground that they are charitable institutions. This is based on the argument that
they are engaged in the “advancement of an object of general public utility” as is included in the fourth limb of the current definition
30
ratio Visvesvarya Technological University v. Assistant Commissioner of Income Tax96 to
submit that there is no loss to the character of a GPU charity where surplus generated is
ploughed back. Further, a judgment of the Division Bench of the Delhi High Court in J.K
Synthetics & Another v. Union of India & Ors.97 was referred to contend that it is not open
for the revenue authorities, without any cogent reason and merely at its own caprices, to
refuse to follow the conclusion reached on the earlier occasion, and to take up a totally
different stand in subsequent years - as was done in this case while refusing to grant
exemption under Section 10 (23C) of IT Act, 1961 to the ICAI.
84. Learned counsel further submitted that the present case involves two circulars issued
by the Board viz. Circular No. 1/2009 dated 27.03.2009 and Circular No. 11/2008 dated
19.12.2008 which are clarificatory and not contrary to any provisions of the Act, 1961 and
hence the ratio of the decision in Ratan Melting and Wire Industries (supra) does not apply.
Reliance was placed on observations made in Navnit Lal Zaveri (supra) and Ellerman Lines
v. Commissioner of Income Tax98 to urge that these circulars are classified as “beneficial”.
They place a purposive interpretation on a statutory provision. Such circulars enormously
reduce litigation and hardship of assessees and they play a vital role in the proper
administration of taxes.
85. It was argued that the demand against ICAI is from 2004-05 and the fees collected
from students have already been spent on various infrastructure development and other
capital expenditure items. The surplus amounts remaining were invested in government
securities/FDs of nationalized banks, so the demands raised will seriously prejudice the
assessees.
86. On behalf of the Tribune Trust, Mr. Datar argued that the charitable nature of the trust
can be traced back to the In Re: Trustees of the Tribune (supra) judgment rendered by the
Privy Council, which allowed the trust’s appeal against the judgment of Lahore High Court
(that rejected exemption for the trust’s income for AY 1932-33). The Privy Council
considered the objects of the trust and held it was not founded for private profit and prima
facie the trust’s object was of general public utility, since by supplying newspapers in the
province the trust involved the dissemination of educated public opinion. It was urged that
the impugned judgment passed by the Punjab and Haryana High Court99 in Tribune’s case
dismissing the Tribune’s appeal, erroneously relied on para 17 of Surat Art Silk decision
(supra) which wrongly quoted the Privy council judgment in the Tribune’s case.
87. It was further argued that collecting advertisements for consideration cannot be
treated as business activity undertaken by profit because the sale price of the newspaper is
₹2 whereas the cost of printing each newspaper is ₹12 and the deficits can be made up only
through advertisements. Placing reliance on the extracts from the will of the late Sardar Dyal
Singh Majithia it was urged that the trustees were under a duty to devote the surplus income
for the improvement of the newspaper and hence prayed for allowing the appeal.
of “charitable purpose”. Such a claim, when made in respect of an activity carried out on commercial lines, is contrary to the
intention of the provision.
5.2 With a view to limiting the scope of the phrase “advancement of any other object of general public utility”, sub-section (15) of
section 2 has been amended to provide that the advancement of any other object of general public utility shall not be a charitable
purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any
service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use
or application, or retention, of the income from such activity.”
96
(2016) 12 SCC 258
97
1981 SCC OnLine Del 457
98
(1972) 4 SCC 474
99
ITA Nos. 62 of 2015 and 147 of 2016 (O&M)
31
88. Upon this court’s query with respect to advancing submissions on the constitutional
aspect in the ITPO judgment (supra), the learned senior counsel advanced his submissions
on the validity of Section 2(15) in the context of Article 14 and Article 289. It was submitted
that classification made in the ITPO judgment i.e., institutions driven by profit motive vis-à-
vis institutions driven by motive to advance objective of GPU, was correct and is in tune with
the decision of this court in NDMC (supra). It was urged that Article 289(1) will not apply to
ITPO as its income and property cannot be regarded as income and property of a State. It
was also submitted that proviso to Section 2(15) applies only to the last limb i.e.,
“advancement of object of general public utility” and not to the preceding limb “education”
and in respect of charity there is no discernible difference between the two. Since there is
no intelligible differentia and rational nexus in this regard, this discrimination offends Article
14.
89. It was argued that the term “for a cess or fee or any other consideration” used in
Section 2(15) is clearly violative of Article 14 as it fails to make a distinction between activities
that are carried out by the State or by the instrumentalities or agencies of the State, and
those carried out by commercial entities for which a consideration is charged. In addition,
Article 289(1) exempts states’ property and income from Union taxation. To permit levy of
income tax on cess or fee collected by a state would violate Article 289(1), hence the word
“cess” or “fee” in the proviso is liable to be declared unconstitutional and violative not only of
Article 14 but of Article 289 as well, in the context of state undertakings. For Central
institutions, it was submitted that cess or fee can never fall within the definition of “income”
under Section 2(24) read with Entry 82 of List-I and cannot be subject to tax.
C. Revenue’s rebuttal arguments
90. In rebuttal to the submissions advanced by the assessees, the ASG relied upon
Adityapur Industrial Area Development Authority v. Union of India100 and submitted that there
is no constitutional immunity from taxation, for the state, because by Article 289(2) even
state or its instrumentalities/agencies are not immune from taxation if they carry on trade or
business. In light of Article 289(2), there is no constitutional bar for the States (or the Union)
to engage or carry on trade or business, and Article 289 allows the Parliament to impose
taxes on such trade or business. The ratio in NDMC (supra) has to be read in light of the
provisions and the judgment rendered in Shri Ramtanu Cooperative Housing Society (supra)
should in turn be read in light of NDMC. The decisive factor therefore is not the status of the
entity, but the nature of activity carried by it. If the nature of activity is trade or business with
a profit motive, then the same can be taxed even if it is carried by state or its
instrumentalities. It was also contended that Article 289 does not grant absolute any
immunity from taxation.
91. The revenue further submitted that the validity of the amendment can be tested
especially in the case of exclusions or exemptions on limited grounds - invalidity,
arbitrariness, unreasonableness, discrimination; and the assessees have not made out a
case under any such ground. Also, by referring to In Re: Trustees of the Tribune and All
India Spinners Association of Mirzapur (supra), it was contended that “general public utility”
is only a statutory creation so as to form part of charitable purposes and it can always be
given a statutory import by subjecting it to conditions and limitations prescribed under
Section 2(15), at different points of time. In other words, it can always be regulated or
modulated through statutory prescriptions, conditions, and limitations while granting an
exemption from taxation. The submission of the assessees, that one has to look only at the
100
(2006) 5 SCC 100
32
objects to determine if it constitutes charitable purpose for Section 2(15) of the Act, is to be
rejected because exemptions or exclusions are not based on mere objects of trust but on
whether the purpose of the trust is “advancement of any other object of general public utility”.
III. Analysis and reasoning
92. The history of the statute and the evolving interpretation of “charitable purpose”
reveals that in - P. Krishna Warriar (supra), this court extensively considered the previous
jurisprudence on the subject (in light of the pre-existing Section 4(3) of the old law), as well
as the amendment introduced in 1953. At that time, income of a charitable organization,
earned from business was subject to limitations. The limitations were that (i) the business
was to be carried on in the course of the actual carrying out of a primary purpose of the trust
or institution; or (ii) the work in connection with the business was to be mainly carried on by
beneficiaries of the institution. These expressions were considered in Krishna Warriar
(supra), where the court held that the term “property” (of a trust) was of widest amplitude,
which included business. The following decision, in Andhra Chamber of Commerce (supra)
where the chamber of commerce had among its objects, one enabling it to advocate policies
or legislation, or oppose them, in addition to the object of promoting business, held that the
incidental inclusion of such objects, involving espousing a political purpose, did not
undermine its essential or main purpose, of advancing objects of general public utility. The
new provision, i.e., Section 2(15) of the IT Act, defined “charitable purpose” restrictively: to
deny tax exemption to activities for profit which were carried on by a trust for the
advancement of an object of general public utility. The reason for this change (discussed
previously) was that the advantage of tax exemption was not intended to charitable trusts
that were commercial concerns, which while ostensibly serving a public purpose, were fully
paid for the benefits provided by them.
93. The first two decisions of some note are Lok Shikshana Trust and Indian Chamber of
Commerce (supra). The former decision, by majority, held that to qualify as a charitable
purpose, two ingredients had to be satisfied. It was held that the change in the definition
meant that to be the fourth category of charitable purpose, it was necessary to show that
“(1) the purpose of the trust is the advancement of any other object of general public utility, and (2)
the above purpose does not involve the carrying on of any activity for profit. Both the above
conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose.”
94. In Indian Chamber of Commerce this court categorically held that even if the activity
for profit, is to further an object of general public utility, the charity could not claim of
exemption. The court went on to indicate the following test:
“21. The true test is to ask for answers to the following questions: (a) Is the object of the assessee
one of general public utility? (b) Does the advancement of the object involve activities bringing in
moneys? (c) If so, are such activities undertaken (i) for profit or (ii) without profit? Even if (a) and (b)
are answered affirmatively, if (c)(i) is answered affirmatively, the claim for exemption collapses. The
solution to the problem of an activity being one for or irrespective of profit is gathered on a footing
of facts. What is the real nature of the activity? One which is ordinarily carried on by ordinary people
for gain? Is there a built-in prescription in the constitution against making a profit?....”
95. The decision in Surat Art Silk, needs careful scrutiny, not only because it is by a larger
Bench, but also because it has been the bulwark of the assessee’s contentions- and has
been the premise upon which almost all High Courts have interpreted Section 2 (15) after its
amendment, in 2008. As noticed earlier, the old Act (in Section 4(3)) did not contain any
terms, restricting or prohibiting charities from engaging in commercial activities or those
which yielded profit. No doubt, the idea of income from business carried on “behalf of a
33
religious or charitable institution” being exempt, provided “the business is carried on in the
course of the actual carrying out of a primary purpose of the institution” was introduced by
amendment, in 1953. This was interpreted in Andhra Chamber of Commerce and Krishna
Warriar (supra). However, Parliament clearly intended a departure, when it introduced the
new Section 2 (15) under the IT Act. The earlier decisions in Indian Chamber of Commerce,
and Lok Shikshana Trust (supra) noticed this change. Surat Art (supra) was yet another a
departure. While it considered the previous decisions of the court, it consciously departed
from them, and even overruled the interpretation in Indian Chamber of Commerce (supra).
The larger Bench in Surat Art Silk agreed with the previous decisions to the effect that the
motivation for the activity in question (i.e., for it to be charitable) should not be deriving of
profits. However, the larger Bench enunciated the principle of ‘predominant object’ and held
that what was of importance was “whether the predominant object of the activity involved in
carrying out the object of general public utility is to subserve the charitable purpose or to
earn profit” and that such an entity would not lose its charitable character merely because
some profit arose from the said activity.
96. Thus, was born the ‘predominant object’ test, of an organization, to determine whether
it was essentially charitable, or ‘for profit’. If the predominant object was not for profit, but
advancement of general public utility, that some profits were earned, would not debar it from
claiming to be an organization with a charitable purpose. However, if the predominant object
was such that profit making was “enwrapped” or “intertwined” with it, the organization or trust
could not be called charitable. Crucially, the court emphasized that the manner of carrying
on of the activity in question, was determinative:
“the nature of the charitable purpose, the manner in which the activity for advancing the charitable
purpose is being carried on and the surrounding circumstances may clearly indicate that the activity
is not propelled by a dominant profit motive.”
97. Interestingly, the test proposed by the majority judgment in Surat Art Silk is similar to
the one advocated in Indian Chamber of Commerce (which it overruled). The difference in
approach is that Surat Art Silk advocated the “predominant object” test to see whether the
object is for advancement of general public utility, bereft of profit motive, whereas in Indian
Chamber of Commerce (supra), the court did not deal with or visualize consideration of a
“predominant object”. The second difference between the two decisions, is that Surat Art
Silk stated that there is no need for an express provision in the constitution of a given trust,
eschewing profit motive, whereas in Indian Chamber of Commerce, the necessity of such a
condition was highlighted.
98. The judgments of this court, after Surat Art Silk (supra), noticed the enunciation of,
and the need to apply the test of “dominant” object. In Commissioner of Income Tax v.
Federation of Indian Chambers of Commerce and Industries101 it was, thus held:
“In other words, the majority view in the Surat Art Silk's case (supra) was that the condition that the
purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making
is not the real object. The theory of dominant or primary object of the trust has, therefore, been
treated to be the determining factor, even in regard to the fourth head of charity, viz., the
advancement of any other object of general public utility, so as to make the carrying on of business
activity merely ancillary or incidental to the main object.”
99. In Bar Council of Maharashtra (supra) this court considered whether a bar council,
constituted under the Advocates Act, 1961, performed activities that were charitable in
nature; it was held that the statute obliged several activities whose dominant object was
101
1981 (3) SCR 489
34
advancement of public utility, without profit motive. This court held that the provisions of the
Act
“enjoined upon avowedly with the objective of protecting the litigating public from unscrupulous
professionals by taking them to task for any misconduct on their part; it is also one of the obligatory
functions of a State Bar Council to promote and support measures for law reform as also to conduct
law seminars and organise talks on legal topics by eminent jurists, obviously with a view to educate
the general public, the function prescribed by Clause (eee) is obviously charitable in nature, the
same being to organise legal aid to the poor. Amongst these various obligatory functions one under
Clause (d) is to safeguard the rights, privileges and interests of the advocates on its roll and it is
difficult to regard it as a primary or dominant function or purpose for which the body is constituted.
Even this function apart from securing speedy discharge of obligations by the litigants to the lawyers
ensures maintenance of high professional standards and independence of the Bar which are
necessary in the performance of their duties to the society. In other words, the dominant purpose of
a State Bar Council as reflected by the various obligatory functions is to ensure quality service of
competent lawyers to the litigating public, to spread legal literacy, promote law reforms and provide
legal assistance to the poor while the benefit accruing to the lawyer-members is incidental…”
100. The view that prevailed, after the decision in Surat Art Silk (supra), therefore, was that
so long as the “dominant” object of a trust was charitable, and it did not essentially involve
in business or commercial activity, the generation of profits, or surpluses by it, through
activities, incidental to that main or dominant activity, did not undermine its charitable
purpose, as long as the surpluses or profits, were used for the advancement of an object of
general public utility.
101. An interesting detail, is that the old Act did not define “charitable purpose” restrictively,
in the manner that the IT Act did, when enacted, in 1961. This lent a fair degree of interpretive
flexibility, to the courts, to decide whether a commercial or business element, could be
interwoven with a charitable object. The amendment of 1953 ensured that income “applied
or accumulated for application to such .. charitable purposes as relate to anything done
within the taxable territories, and in the case of property so held in part only for such
purposes, the income applied or finally set apart for application…”102 could not be included
as taxable income of any charitable organization. This provision is a precursor for Section
11 under the IT Act. In other words, the structure of the old Act did not prohibit the carrying
on of business; it spelt out a condition that any income derived from business “carried on in
the course of the actual carrying out of a primary purpose of the institution” if applied for
charitable purposes, was exempt.
102. The second aspect is that Surat Art Silk (supra), was rendered in the context of Section
2(15) of the IT Act, as it stood originally. However, by the Taxation Laws Amendment Act,
1975 (w.e.f. 01.04.1977), Section 13(1)(bb) was inserted. That provision excluded the
operation of Sections 11 and 12 (under which income of charities were entitled to be
exempted) in the case of income derived from business by charities engaged in medical
relief, education and relief to the poor, unless the business fulfilled a condition:
“(bb) in the cases of a charitable trust or institution for the relief of the poor, education or medical
relief, which carries on any business, any income derived from such business, unless the business
is carried on in the course of the actual carrying out of a primary purpose of the trust or institution;"
103. The interpretation in Surat Art Silk (supra), obviously could not have been affected, in
the light of a subsequent amendment; however, what is of significance is that with effect
from 01.04.1977, the condition of actual carrying on a primary purpose of the trust while
102
Section 4(3)(i) of the old IT Act.
35
conducting business was visualised only in the case of trusts involved in relief of the poor,
education or medical relief. The majority judgment in Surat Art Silk (supra) recognized this:
“8. […] Where therefore, there is a charitable trust or institution falling within any of the first three
categories of charitable purpose set out in Section 2 Clause (15) and it carries on business which is
held by it under trust for its charitable purpose, income from such business would not be exempt by
reason of Section 13(1)(bb). Section 11 Sub-section (4) would, therefore, have no application in
case of a charitable trust or institution falling within any of the first three heads of 'charitable
purpose'.”
Yet, the court enunciated and applied the ‘predominant object’ test. 103 The conscious
omission of the last object, i.e., the GPU category, in the newly inserted 13(1)(bb), therefore,
meant that when those trusts, while carrying out the object of advancement of general public
utility, had to conduct of business, the income was to be taxed (because the main provision,
under Section 13(1) excluded the operation of Sections 11 and 12).
104. The next significant change, which occurred was with the Finance Act, 1983 (w.e.f.
01.04.1984). This amendment:
(a) omitted the restrictive words under Section 2(15) i.e. “not involving the carrying on of any
activity for profit”
(b) omitted Section 13(1)(bb)
(c) Section 11(4A) was inserted104, by which - in relation to charities set up with the object of
general public utilities, “business” could be “carried on by an institution wholly for charitable
purposes and the work in connection with the business is mainly carried on by the beneficiaries of
the institution, and separate books of account are maintained by the trust or institution in respect of
such business”.
105. It is therefore clear that after 1 April, 1984, the statute did not contain any restriction
as to the nature of activity that could be carried on by GPU category charity. Furthermore,
the condition in Section 13(1)(bb) - which applied to other kinds of trusts, i.e., that their
incomes could be exempt under Section 11 to the extent they arose out of business, if the
business was “in the course of the actual carrying out of a primary purpose of the trust”- was
deleted. On the other hand, the wording of Section 11(4A) did seem to indicate that business
activity was permissible if the objects of the trust were wholly charitable, and such business
were to be carried on by its beneficiaries. This legal position continued, till the amendments
in question were carried out, in relation to Section 2(15) in 2008.
106. Section 2 begins with the expression “unless the context otherwise requires”- as a
preface to every expression which is sought to be defined, under the IT Act. The 1922 Act
did not contain any words of restriction, in the definition clause. 105The IT Act, however,
defined charitable purpose - at the outset, restrictively, and then, substantively enacted
provisions that give effect to Parliamentary intent. Section 10 (23C)(iv) exempts any
“income” of “any other fund or institution established for charitable purposes which may be
103
See para 19 of Surat Art Silk (extracted above at paragraph 18 of this judgment).
104
"(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income, being
profits and gains of business, unless –
(a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and
publication of books or publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette;
or
(b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is
mainly carried on by the beneficiaries of the institution, and separate books of account are maintained by the trust or institution in
respect of such business. …"
105
U.S. 216 (1936)
36
approved by the prescribed authority, having regard to the objects of the fund or institution
and its importance throughout India or throughout any State or States” from taxation.
A. Aids to interpretation
(i) History of the legislation
107. The amendments (i.e. Finance Act 2008, Finance Act 2009, Finance Act 2012 and
Finance Act 2015) do not throw light – by way of statement of objects and reasons or notes
on clauses. The court, therefore would have to resort to the surrounding circumstances that
led to the amendment.
108. The words of a statute are to be construed in their terms, according to the
circumstances in which they occur. At the same time, there is some authority for the
proposition that statutes – particularly amending provisions, may be considered in the light
of the previous history of the legislation. Justice Cardozo in Duparquet Co. v. Evans105 said
that in questions relating to construction, "history is a teacher that is not to be ignored”. In a
similar vein, Chief Judge Learned Hand said that “statutes always have some purpose or
object to accomplish, whose sympathetic and imaginative discovery is the surest guide to
their meaning”106.
109. Some decisions of this Court have highlighted this aspect. In Bhuwalka Steel Indus.
Ltd. & Ors. v. Bombay Iron and Steel Labour Bd. & Ors. 107 this court observed that
“The legislative intent of the enactment may be gathered from several sources which are, from the
statute itself, from the preamble to the statute, from the Statement of Objects and Reasons, from
the legislative debates, reports of committees and commissions which preceded the legislation and
finally from all legitimate and admissible sources from where they may be allowed. Reference may
be had to legislative history and latest legislation also. But, the primary rule of construction would
be to ascertain the plain language used in the enactment which advances the purpose and object
of the legislation...”
110. In Chief Justice of Andhra Pradesh & Ors. v. L.V.A. Dixitulu & Ors.108 again, the court
held that resort to the history of the legislation is legitimate, for interpreting a provision:
“..in order to ascertain the true meaning of the terms and phrases employed, it is legitimate for the
Court to go beyond the arid literal confines of the provision and to call in aid other well-recognised
rules of construction, such as its legislative history, the basic scheme and framework of the statute
as a whole, each portion throwing light on the rest, the purpose of the legislation, the object sought
to be achieved, and the consequences that may flow from the adoption of one in preference to the
other possible interpretation.”
111. Other decisions109 have also commented on the use of history of the legislation as a
tool for its construction. It is, therefore, clear that courts can look at the previous history of
the statute, and the changes it underwent to discern what is intended by the lawmakers
when an amendment is introduced, or a new law enacted. In light of these factors, it would
therefore, also be useful for the court to consider the background which led to the
amendment – firstly in 2008 and thereafter in 2012 and 2015, seeking to restrict the nature
of activities that a GPU category charity can legitimately undertake.
106
Cabell v. Markham (1945) 148 F 2d 737
107
2009 (16) SCR 618
108
1979 (1) SCR 26
109
Lohia Machines Ltd. and Ors. v. Union of India & Ors 1985 (2) SCR 686; Commissioner of Customs (Import), Mumbai v. Dilip
Kumar & Company & Ors 2018 (9) SCC 1
37
(ii) Other extrinsic aids to construction of the statute
(a) Speeches in Parliament
112. Speeches made in the legislature or Parliament, can be looked into for throwing light
on the rationale for an amendment. There is some authority for that proposition.110 Some
light can be discerned from the statement of the finance minister on the floor of Parliament,
who answered to the criticism levelled against the change brought about by the amendment
in 2008. The finance minister commented on the criticism levelled against the amendment
to Section 2(15) in the following words:
"I once again assure the House that genuine charitable organisations will not in any way be affected.
The CBDT will, following the usual practice, issue an explanatory circular containing guidelines for
determining whether an entity is carrying on any activity in the nature of trade, commerce or business
or any activity of rendering any service in relation to any trade, commerce or business. Whether the
purpose is a charitable purpose will depend on the totality of the facts of the case. Ordinarily,
Chambers of Commerce and similar organisations rendering services to their members would not
be affected by the amendment and their activities would continue to be regarded as "advancement
of any other object of general public utility".”
(b) Departmental circulars
113. Learned counsel for the assessees relied upon Circular No. 1/2009 dated 27.03.2009
and Circular No. 11/2008 dated 19.12.2008 issued by the Central Board of Direct Taxes.
The relevant part of Circular No. 11/2008 reads as follows:
“3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is
‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of
‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption
under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether
such an entity is carrying on an activity in the nature of trade, commerce or business is a question
of fact which will be decided based on the nature, scope, extent and frequency of the activity.
3.1. There are industry and trade associations who claim exemption from tax u/s 11 on the ground
that their objects are for charitable purpose as these are covered under ‘any other object of general
public utility’. Under the principle of mutuality, if trading takes place between persons who are
associated together and contribute to a common fund for the financing of some venture or object
and in this respect have no dealings or relations with any outside body, then any surplus returned
to the persons forming such association is not chargeable to tax. In such cases, there must be
complete identity between the contributors and the participants.
Therefore, where industry or trade associations claim both to be charitable institutions as well as
mutual organizations and their activities are restricted to contributions from and participation of only
their members, these would not fall under the purview of the proviso to section 2(15) owing to the
principle of mutuality. However, if such organizations have dealings with non-members, their claim
110
State of West Bengal v. Union of India 1964 (1) SCR 371:
“A statute, as passed by Parliament, is the expression of the collective intention of the legislature as a whole, and any statement
made by an individual, albeit a Minister, of the intention and objects of the Act cannot be used to cut down the generality of the
words used in the statute.”
At the same time, later decisions have relaxed the rigor of this rule. In K.P. Varghese v. Income-tax Officer, 1982 (1) SCR 629,
this court, referring to the budget speech of the Minister stated:
“Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a
statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by
the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining
the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted.”
Other decisions following the same approach are Ramesh Yeshwant Prabhoo v. Prabhakar Kashinath Kunte 1995 (Supp 6) SCR
371; Novartis AG v. Union of India (2013) 6 SCC 1; Surana Steels (P) Ltd. v. Commissioner of Income Tax 1999 (2) SCR 589
and Kalpana Mehta & Ors. v. Union of India (UOI) and Ors 2017 (7) SCC 295.
38
to be charitable organizations would now be governed by the additional conditions stipulated in the
proviso to section 2 (15).”
114. Circular No. 1/2009 dated 27.03.2009 contains explanatory notes to provisions of the
Finance Act, 2008. It inter alia reads as follows:
“5. Streamlining the definition of "charitable purpose"
5.1 Sub-section (15) of section 2 of the Act defines "charitable purpose" to include relief of the
poor, education, medical relief, and the advancement of any other object of general public utility. It
has been noticed that a number of entities operating on commercial lines are claiming exemption
on their income either under sub-section (23C) of section 10 or section 11 of the Act on the ground
that they are charitable institutions. This is based on the argument that they are engaged in the
"advancement of an object of general public utility" as is included in the fourth limb of the current
definition of "charitable purpose". Such a claim, when made in respect of an activity carried out on
commercial lines, is contrary to the intention of the provision.
5.2 With a view to limiting the scope of the phrase “advancement of any other object of general
public utility", sub-section (15) of section 2 has been amended to provide that the advancement of
any other object of general public utility shall not be a charitable purpose, if it involves the carrying
on of any activity in the nature of trade, commerce or business, or any activity of rendering any
service in relation to any trade, commerce or business, for a cess or fee or any other consideration,
irrespective of the nature of use or application, or retention, of the income from such activity. Scope
of this amendment has further been explained by the CBDT vide its circular no.11/2008 dated 19th
Dec 2008.”
115. Senior counsel appearing for the assessees relied on Section 119 of the IT Act as well
as decisions of this court, reported as Navnit Lal Jhaveri (supra) and UCO Bank Calcutta
(supra) and argued that departmental circulars are binding upon tax administrators, and
should be legitimately considered as aids of construction. This was in support of their
reliance on the circulars in the present case (No.11/2008 and No. 1/2009).
116. This court in Navnit Lal Jhaveri (supra) considered Sections 2(6A)(e) and 12(1B) of
the IT Act which were introduced by the Finance Act, 15, 1955 (w.e.f. 01.04.1955). As a
result of these amendments, the combined effect of the two provisions was that three kinds
of payments made to shareholders companies to which those applied, were treated as
taxable dividend to the extent of the accumulated profits held by the company. The provision
was challenged. It was noticed that while introducing the amendment, the Finance Minister
assured that outstanding loans and advances – otherwise liable to taxation as dividends in
AY 1955-56, would not be subjected to tax if it were shown that they had been genuinely
refunded to the respective companies before 30.06.1955. The government felt that unless
such a step was taken, the operation of Section 12(1B) would lead to extreme hardship, as
it would cover the aggregate of all outstanding loans of past years and could have led to
unreasonably high liability on shareholders to whom the loans might have been advanced.
A circular [No. 20(XXI-6) /55] was issued by the Central Board of Revenue on 10.05.1955.
The court, in that context, observed that:
“It is clear that a circular of the kind which was issued by the Board would be binding on all officers
and persons employed in the execution of the Act under s. 5(8) of the Act. This circular pointed out
to all the officers that it was likely that some of the companies might have advanced loans to their
shareholders as a result of genuine transactions of loans, and the idea was not to the effect such
transactions and not to bring them within the mischief of the new provision.
The officers were, therefore, asked to intimate to all the companies that if the loans were repaid
before the 30th June, 1955, in a genuine manner, they would not be taken into account in determining
the tax liability of the shareholders to whom they may have been advanced. In other words, past
39
transactions which would normally have attracted the stringent provisions of s. 12(1B) as it was
introduced in 1955, were substantially granted exemption from the operation of the said provisions
by making it clear to all the companies and their shareholders that if the past loans were genuinely
refunded to the companies, they would not be taken into account under s. 12(1B). Section 12(1B)
would, therefore, normally apply to loans granted by the companies, to their respective shareholders
with full notice of the provisions prescribed by it.”
117. This court ultimately upheld the amendments. As is evident, the judgment noticed that
the circular sought to soften the rigors of the otherwise harsh consequence of immediate
application of the amendment. There was nothing in the circular to make it applicable for all
times to come. It was more in the nature of the government issuing a temporary suspension
of operation of the substantive provision, introduced by the amendment.
118. In UCO Bank, Calcutta (supra), this court had to deal with circulars issued under
Section 145 regarding the method of accounting to be followed, in the context of bank loans
to be written off, when an assessee was following the mercantile system (of accounting).
The court inter alia, held that under Section 119 (2) of the IT Act, the Central Board of Direct
Taxes is empowered, for proper and efficient management of assessment and collection of
revenue to issue general or special orders in respect of any class of incomes or class of
cases setting forth directions or instructions, not being prejudicial to assessees, as the
guidelines, principles or procedures to be followed in the work relating to assessment. The
court held that the
“9. […] The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair
enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section
119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under
Section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the
assessee. Thus, the authority which wields the power for its own advantage under the Act is given
the right to forego the advantage when required to wield it in a manner it considers just by relaxing
the rigour of the law or in other permissible manners as laid down in Section 119. The power is given
for the purpose of just, proper and efficient management of the work of assessment and in public
interest.”
119. The view expressed in Navnit Lal Jhaveri (supra), and later elaborated in UCO Bank
(supra) appears to have found resonance in other decisions 111 of this court. A recent
instance where this court took aid of explanatory circulars is in CIT v. Vatika Township112
when after holding that the amendment in question applied prospectively, the court also
supported that holding by citing the revenue’s understanding about such prospective
application, in a circular. What is of note in that judgment, is that the question of whether
circulars or explanatory notes issued by the executive are binding aids of construction was
not discussed; more importantly, the court first interpreted the statute, in its own terms, and
then cited the circular.
120. That circulars are per se not binding upon courts, in regard to interpretation of a
statutory provision and, at best are guides or aid to interpretation for departmental
authorities, who are bound to take them into account, was pithily stated in Keshavji Ravji &
Co. and Ors. v. Commissioner of Income Tax113 where the court observed as follows:
“This contention and the proposition on which it rests, namely, that all circulars issued by the Board
have a binding legal quality incurs, quite obviously, the criticism of being too broadly stated. The
111
Ellerman Lines Ltd. v. Commissioner of Income tax 1972 (2) SCR 168; K.P. Verghese v. Commissioner of Income Tax 1982 (1)
SCR 629; Union of India v. Azadi Bachao Andolan 2003 (Supp 4) SCR 222
112
(2015) 1 SCC 1
113
1992 (2) SCC 231
40
Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the 'Act' by
issuing circulars on the subject. This is too obvious a proposition to require any argument for it. A
circular cannot even impose on the tax payer a burden higher than what the Act itself on a true
interpretation envisages. The task of interpretation of the laws is the exclusive domain of the courts.
However, this is what Sri Ramachandran really has in mind - circulars beneficial to the assessees
and which tone down the rigour of the law issued in exercise of the statutory power under Section
119 of the Act or under corresponding provisions of the predecessor Act are binding on the
authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority
under the Act. The circulars do not bind them. But the benefits of such circulars to the assessees
have been held to be permissible even though the circulars might have departed from the strict tenor
of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying
that such circulars would either have a binding effect in the interpretation of the provision itself or
that the Tribunal and the High Court are supposed to interpret the law in the light of the circular.
There is, however, support of certain judicial observations for the view that such circulars constitute
external aids to construction.”
121. This view was accepted in Commissioner of Customs v. Indian Oil Corporation114,
which articulated the position with some degree of clarity. Commenting on Navnit Lal Jhaveri
(supra) and other decisions, it was observed that:
“30. No proposition was laid down in that case that even if the circular was clearly contrary to the
provisions of the Act it should prevail, On the other hand, the learned Judges were inclined to view
the circular as granting the benefit of exemption from the operation of the impugned provisions
subject to fulfilment of certain conditions. Navnit Lal's case was referred to and construed in two
cases decided by Benches of two learned Judges. The first one was the case of Ellerman Lines Ltd.
v. Commissioner of Income Tax, West Bengal [1971]82ITR913(SC) and the other is K.P. Varghese
v. I.T. Officer, Ernakulam [1981]131ITR597(SC) . In both these cases it was assumed that Navnit
Lal's case was an authority for the proposition that even if the directions given in the circular clearly
deviate from the provisions of the Act, yet, the Revenue is bound by it. These three decisions were
repeatedly referred to and relied on in the subsequent decisions in which the issue arose as regards
the binding nature of the circulars either under the Income Tax Act or under the Central Excise Act.
In between, there was the three Judge Bench decision in Sirpur Paper Mills Ltd. v. Commissioner
of Wealth Tax [1970]77ITR6(SC) in which Section 13 of the Wealth Tax Act corresponding to Section
5(8) of the Income Tax Act, 1922 fell for consideration. This Court took the view that the instructions
issued by the Board may control the exercise of the power of the departmental officials in matters
administrative but not quasi-judicial. There is yet another decision of a three Judge Bench which
seems to make a dent on the weight of the proposition that the circulars of the Board, even if they
are plainly contrary to the provisions of the Act, should be given effect to and binding on the
authorities concerned in the administration of the Act. That is the case of Keshavji Ravji & Co. v. I.T.
Commissioner [1990] 183 ITR 1(SC)”
122. In view of a conflict between decisions, on the binding nature of circulars issued by
the Board (in the context of decisions of authorities dealing with indirect taxation issues) this
court, by a five-judge decision, in Ratan Melting and Wire Industries (supra) held that
“6. Circulars and instructions issued by the Board are no doubt binding in law on the authorities
under the respective statutes, but when the Supreme Court or the High Court declares the law on
the question arising for consideration, it would not be appropriate for the Court to direct that the
circular should be given effect to and not the view expressed in a decision of this Court or the High
Court. So far as the clarifications/circulars issued by the Central Government and of the State
Government are concerned they represent merely their understanding of the statutory provisions.
They are not binding upon the court. It is for the Court to declare what the particular provision of
114
2004 (2) SCR 511
41
statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary
to the statutory provisions has really no existence in law.”
123. In the opinion of this court, the views expressed in Keshavji Ravji, Indian Oil
Corporation and Ratan Melting and Wire Industries (though the last decision does not cite
Navnit Lal Jhaveri), reflect the correct position, i.e., that circulars are binding upon
departmental authorities, if they advance a proposition within the framework of the statutory
provision. However, if they are contrary to the plain words of a statute, they are not binding.
Furthermore, they cannot bind the courts, which have to independently interpret the statute,
in their own terms. At best, in such a task, they may be considered as departmental
understanding on the subject and have limited persuasive value. At the highest, they are
binding on tax administrators and authorities, if they accord with and are not at odds with the
statute; at the worst, if they cut down the plain meaning of a statute, or fly on the face of their
express terms, they are to be ignored.
B. Interpretation of Section 2(15), the definition clause
124. Section 2 of the Income Tax Act opens with the phrase “unless the context otherwise
requires”. It has been held in S.K. Gupta & Anr. v. K.P. Jain & Anr.115 that where the definition
of a term is preceded by this phrase, normally, the definition given in the section “should be
applied and given effect to but this normal rule can be deviated if there is something in the
context to show that the definition should not be applied”. This rule was also adopted in
Indira Nehru Gandhi v. Shri Raj Narain and Anr.116 by Khanna, J and in Kalya Singh v. Genda
Lal and Ors117. Previously, in Vanguard Fire and Insurance Company Ltd. v. M/s. Fraser and
Ross and Anr.118, it was held that the term “unless the context otherwise requires” implies
that the word or term so defined should be applied – subject to the context. It was held that
in view of such a qualification, the Court has not only to look at the words but also to look at
the context, collocation, and the object of such words in respect of such matters and factor
the meaning to be conveyed by the use of the words under the circumstances. Almost the
same reasoning has been echoed in N.K. Jain and Ors. v. C.K. Shah and Ors119.
125. The importance of terms expressly defined in a statute is that they are internal and
binding aids to interpretation. The prefacing – to any definition – of the phrase “unless the
context otherwise requires” merely signifies that in case there is anything expressly to the
contrary, in any specific provision(s) in the body of the Act, a different meaning can be
attributed. However, to discern the purport of a provision, the term, as defined has to prevail,
whenever the expression is used in the statute. This rule is subject to the exception that
when a contrary intention is plain, in particular instances, that meaning is to be given.
Therefore, in the light of the previous discussion, this court would interpret the true meaning
of “charitable purpose” after its amendment in 2008, taking into consideration the
subsequent changes.
126. As observed at the beginning of this judgment, GPU charities have been recognized
as distinct from the ‘per se categories’ of charity (education, medical relief, relief to the poor;
and later - preservation of water sheds, monuments, environment, and yoga). The judgment
of this court in Dharmadeepti (supra) has clarified that the per se categories – are not
subjected to the restrictive condition of eschewing activities of profit. This enunciation of the
115
(1979) 3 SCC 54.
116
(1975) Supp. SCC 1
117
(1975) 3 SCR 783
118
(1960) 3 SCR 837
119
(1991) 1 SCR 938
42
principle has been endorsed in all later decisions – starting with Surat Art Silk (supra).
Therefore, the restriction imposed by Parliament against charities – prohibiting them from
carrying on activities of profit do not apply to the first six categories. Although the occasion
did not so arise in Surat Art Silk (supra) (since this Court was dealing with AYs prior to 1975),
the provision in Section 13(1)(bb) which prevailed then with effect from 01.04.1977 made
the position clearer in that it permitted these per se category charities, in the course of their
actual carrying on of their activities, to earn profits. Of course, this provision was deleted
from 01.04.1984. Alongside, the restriction imposed on GPUs from engaging in activities for
profit, was also deleted.
127. As noticed in Thanthi Trust (supra), Section 11(4A) was originally introduced with
effect from 01.04.1984 and substituted w.e.f. 01.04.1991. At that stage, the statute as it
stood, did not restrict GPU category charities from carrying on activities of profit or from
carrying on business. This court nevertheless was bound by the decision in Surat Art Silk
(supra) which had ruled that:
(i) A GPU category charity with a constitution granting discretion to the trustees to
engage in charitable and non-charitable activities, could not claim the exemption;
(ii) The main or dominant purpose of the GPU category charity had to be essentially
charitable. If it was so, and it incidentally entailed carrying on activities that led to profit, it
was entitled to exemption.
128. This court’s understanding of the law as expressed in Thanthi Trust was therefore,
coloured by the statute as it existed, and the formulation in Surat Art Silk (supra). As a result,
Thanthi Trust, interpreted Section 11(4A) in this background and held that the assessee in
that case incidentally was engaged in activities for profit. The court was also of the opinion
that Section 11(4A) was wider than the revenue urged it to be, in that activities by way of
business could not be carried on incidentally by a Trust, which otherwise was a GPU
category trust.
129. As noticed earlier, between Surat Art Silk (supra) and the decisions rendered
thereafter (i.e., Bar Council of Maharashtra, Federation of Indian Chamber of Commerce
and Industries and Thanthi Trust) there were two changes in law in 1983 w.e.f. 01.04.1984
– on the one hand deleting the restrictive words prohibiting GPU categories from carrying
on profit, and deleting Section 13(1)(bb), and introducing Section 11(4A), on the other. There
was otherwise no meaningful statutory change. The position therefore, continued as it was
for about 25 years.
130. After its introduction, by amendment in 2008, Section 2(15) read as follows:
(15) “charitable purpose” includes relief of the poor, education, medical relief, and the advancement
of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable
purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business,
or any activity of rendering any service in relation to any trade, commerce or business, for a cess or
fee or any other consideration, irrespective of the nature of use or application, or retention, of the
income from such activity;”
131. The term “in the nature of” occurring in Section 2(15) has frequently been interpreted
by this court. In G. Venkataswami Naidu v. Commissioner of Income Tax120 the isolated
transaction of sale of land was held not to be activity in the nature of trade or business. In
120
1959 (Supp 1) SCR 646
43
State of Tamil Nadu v. Burmah Shell Oil Storage Distribution Company of India Ltd.121 the
test indicated was whether the “frequency, volume, continuity and regularity of transactions
carried on with a profit-motive”. In State of Tamil Nadu v. Shakti Estates122, the assessee’s
activities in leasing forest lands, clearing them, and creation of wooden sleepers, which were
sold, as well as charcoal, which was sold, in a series of “sustained, systematic and organised
activities” was held to be in the nature of business. In Director of Civil Supplies v. Member
Board of Revenue123 this court outlined, what would be activity in the nature of business:
“To regard an activity as business there must be a course of dealings, either actually continued or
contemplated to be continued with a profit- motive; there must be some real and systematic or
organised course of activity or conduct with a set purpose of making profit. To infer from a course
of transactions that it is intended thereby to carry on business ordinarily there must exist the
characteristics of volume, frequency, continuity and system indicating an intention to continue the
activity of carrying on the transactions for a profit. But no single test or group of tests is decisive of
the intention to carry on the business. “
132. The term “in relation to” was interpreted in Renusagar Power Co. Ltd. v. General
Electric Co.124 in an arbitration clause - as follows:
“25... (2) Expressions such as “arising out of or “in respect of or “in connection with” or “in relation
to” or “in consequence of or “concerning” or “relating to” the contract are of the widest amplitude and
content..”
In Mansukhlal Dhanraj Jain v. Eknath Vithal Ogale125 this court underlined the amplitude to
the term “relating to”:
“16. It is, therefore obvious that the phrase “relating to recovery of possession” as found in Section
41(1) of the Small Cause Courts Act is comprehensive in nature and takes in its sweep all types of
suits and proceedings which are concerned with the recovery of possession of suit property from
the licensee and, therefore, suits for permanent injunction restraining the Defendant from effecting
forcible recovery of such possession from the licensee-Plaintiff would squarely be covered by the
wide sweep of the said phrase.”
In Doypack System (P) Ltd. v. Union of India126, this court ruled that the expression “in
relation to” is broad and is akin to the “concerning with” and “pertaining to”; and is also
expansive. The court observed:
“50. The expression “in relation to” (so also “pertaining to”), is a very broad expression which
presupposes another subject matter. These are words of comprehensiveness which might have
both direct significance as well as indirect significance depending on the context [internal citation
omitted].
Assuming that the investments in shares and in lands do not form part of the undertaking but are
different subject matters, even then these would be brought within the purview of the vesting by
reason of the above expressions. In this connection reference may be made to 76 Corpus Juris
Secundum at pages 620 and 621 where it is stated that the term “relate” is also defined as meaning
to bring into association or connection with. It has been clearly mentioned that “relating to” has been
held to be equivalent to or synonymous with as to “concerning with” and “pertaining to”. The
expression “pertaining to” is an expression of expansion and not of contraction.”
121
1973 (2) SCR 636
122
1989 (1) SCR 408
123
1967 (3) SCR 778
124
1985 (1) SCR 432
125
1995 (1) SCR 996
126
1988 (2) SCC 299
44
133. The position, therefore, with respect to what kind activities GPU charities could
legitimately undertake, was in a state of flux till 2015. However, the amendments
cumulatively point to prohibitions that were constant:
(1) the prohibition applicable to such charities involved in carrying on activities “in the
nature of trade, commerce or business, or any activity of rendering any service in relation to
any trade, commerce or business, for a cess or fee or any other consideration”
(2) “irrespective of the nature of use or application, or retention, of the income from such
activity” (i.e. activity in the nature of trade, commerce or business for a cess, fee or other
consideration).
134. By retrospective amendment, in Section 2(15), after the proviso, a second proviso was
inserted with effect from 01.04.2009 .-
"Provided further that the first proviso shall not apply if the aggregate value of the receipts from the
activities referred to therein is ten lakh rupees or less in the previous year;";
With the introduction of the second proviso, the resulting situation was that the first proviso
(of exclusion of income through an activity as referred to) was inapplicable if the aggregate
value of the receipts of such activity did not exceed ₹10,00,000, and later by Finance Act,
2012 – this was enhanced to ₹25,00,000.
135. The next important change took place through the Finance Act, 2015, which, w.e.f.
01.04.2016 substituted the two provisos to Section 2(15) with the following proviso:
“Provided that the advancement of any other object of general public utility shall not be a charitable
purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business,
or any activity of rendering any service in relation to any trade, commerce or business, for a cess or
fee or any other consideration, irrespective of the nature of use or application, or retention, of the
income from such activity, unless—
(i) such activity is undertaken in the course of actual carrying out of such advancement of any
other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed
twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities,
of that previous year;”
136. The limited relief, given by the second proviso, to GPU charities (for the period 2009-
2015) was that in case such GPU category charities did carry on activities undertaken in the
course of actual carrying out of their GPU objects that were in the nature of trade, commerce
or business, or rendered any service in relation to trade, business, etc., and collected fee,
cess, or other consideration, such income could still be exempt, if it did not exceed
₹10,00,000 (and later, ₹25,00,000). By the amendment of 2015, the second proviso was
deleted and two conditions were introduced, with respect to permissibility of carrying on
trade, commerce, etc:
(i) such activity is undertaken in the course of actual carrying out of such advancement
of any other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not
exceed twenty percent of the total receipts, of the trust or institution undertaking such activity
or activities, of that previous year.
137. Having thus far discussed a nature of the changes to the term “charitable purpose”
and how judicial thinking has shaped it, this court would now explore the all important
question of the scope of the term of “any other object generally public utility” not being
45
charitable purpose “if it involves the carrying on of any activity in the nature of trade,
commerce or business or any activity of rendering any service in relation to any trade,
of use or application, or retention, of the income from such activity.”
138. Parliamentary endeavour, was to alter the regime applicable to taxation of GPU
category charities, under the IT Act. The absolute bar imposed on GPU charities from
carrying on activities in the nature of trade, commerce or business, or of rendering any
service in relation to any trade, commerce or business, for a cess or fee or any other
consideration, evidences this intent. The original Section 2(15) did not allude to trade,
commerce or business, or any service in relation to such activities. It only enjoined the GPU
charities from involving themselves from carrying on of any activity for profit127 (which was
interpreted in Surat Art Silk). This substantial change brought about by the amendments of
2008 -2012 and 2015 is the prohibition from engaging in any kind of activity in the nature of
business, commerce, or trade or any rendering any service in relation thereto, and earning
income by the way of cess, fee or consideration. In the opinion of this court, the express
deletion of the reference to ‘activity for profit’ on the one hand, and the enactment of an
expanded list of what cannot be done by GPU charities if they are to retain their characteristic
as charities, is an emphatic manner in which Parliament wished to express itself.
139. Counsel on both sides went to great lengths and cited several judgments for the
proposition that “trade or business” are terms which imply profit-making. They relied on
Khoday Distilleries (supra); M/s. Raipur Manufacturing (supra); Board of Trustees of the Port
of Madras (supra), and Physical Research Laboratory v. K. G. Sharma128. It was contended
by the revenue, that the reference to terms “business, trade or commerce” and “service in
relation to” such activities are meant to imply that profit motive should be completely absent.
At the same time - on behalf of the assessees, it was contented that if the proscribed
activities i.e., business, commerce or trade or service in relation to such activities - is not the
main or dominant object of the GPU charity, any incidental involvement in such activities is
permissible. Counsel on behalf of many assessees urged that some of them are statutory
corporations charged with developing housing industrial infrastructure sector, regulation of
professions (such as chartered accountants, etc.). It was underlined that such corporations
are agencies of the state, recognized as “State” under Article 12 of the Constitution, and
carry out the essential purposes for which they were set up, which otherwise state
departments would have been expected to carry out. It was then emphasized that the
activities of such corporations cannot be characterized as motivated by profit- rather their
essential purposes are to achieve objects of general public utility.
140. In Town Investments v. Department of Environment 129 , it was remarked that
“business” is an ‘etymological chameleon’. In NDMC (supra) - while dealing with the question
of immunity of states and state corporations, municipal corporations and local authorities
from union taxation, this court (in a nine-judge bench composition) interpreted Article 289 of
the Constitution130 and discussed the nature of the activities that could be carried on by state
or state agencies:
127
“…the advancement of any other object of general public utility not involving the carrying on of any activity for profit"
128
(1997) 4 SCC 257.
129
1977 1 ALLER 813
130
289. Exemption of property and income of a State from Union taxation.—(1) The property and income of a State shall be exempt
from Union taxation.
(2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if
any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government
46
“Section 155(1) which by its own force levied taxes upon the trading and business operations carried
on by the Provincial Governments did not either define the said expressions or specify which trading
or business operations are subject to taxation. On this account, the proviso was not and could not
be said to have been, ineffective or unenforceable. It was effective till 26-1-1950. Clause (2) of
Article 289 also similarly does not define or specify — nor does it require that the law made
thereunder should so define or specify. It cannot be said that unless the law made under and with
reference to clause (2) specifies the particular trading or business operations to be taxed, it would
not be a law within the meaning of clause (2). Coming back to the language of clause (2), a question
is raised, why does the proviso speak of taxation in respect of trade or business when the main limb
of sub-section (1) speaks only of taxes in respect of lands or buildings and income? Is the ambit of
proviso wider than the main limb? Is it an independent provision of a substantive nature
notwithstanding the label given to it as a proviso? Or is it only an exception? It is asked. We are,
however, of the considered opinion that it is more important to give effect to the language of and the
intention underlying the proviso than to find a label for it. It is clarificatory in nature without a doubt;
it appears to be more indeed. It is concerned mainly with the “income” (of Provincial Governments)
referred to in the main limb of sub-section (1). It speaks of tax on the “lands or buildings” in that
context alone, as we shall explain in the next paragraph. The idea underlying the proviso is to make
it clear that the exemption of income of Provincial Government operates only where the income is
earned or received by it as a Government; it will not avail where the income is earned or received
by the Provincial Government on account of or from any trade or business carried on by it — that is
a trade or a business carried on with profit motive. In the light of the language of the proviso to
Section 155 and clause (2) of Article 289, it is not possible to say that every activity carried on by
the Government is governmental activity. A distinction has to be made between governmental
activity and trade and business carried on by the Government, at least for the purposes of this
clause. It is for this reason, we say, that unless an activity in the nature of trade and business is
carried on with a profit motive, it would not be a trade or business contemplated by clause (2). For
example, mere sale of government properties, immovable or moveable, or granting of leases and
licences in respect of its properties does not amount to carrying on trade or business. Only where a
trade or business is carried on with a profit motive — or any property is used or occupied for the
purpose of carrying on such trade or business — that the proviso [or for that matter clause (2) of
Article 289] would be attracted. Where there is no profit motive involved in any activity carried on by
the State Government, it cannot be said to be carrying on a trade or business within the meaning of
the proviso/clause (2), merely because some profit results from the activity [ For example, almost
every State Government maintains one or more guest houses in Delhi for accommodating their
officials and others connected with the affairs of the State. But, when some rooms/accommodation
are not occupied by such persons and remain vacant, outsiders are accommodated therein, though
at higher rates. This activity cannot obviously be called carrying on trade or business nor can it be
said that the building is used or occupied for the purpose of any trade or business carried on by the
State Government.] . We may pause here a while and explain why we are attaching such restricted
meaning to the words “trade or business” in the proviso to Section 155 and in clause (2) of Article
289. Both the words import substantially the same idea though, ordinarily speaking, the expression
“business” appears to be wider in its content. The expression, however, has no definite meaning; its
meaning varies with the context and several other factors. … Having regard to the context in which
the words “trade or business” occur — whether in the proviso to Section 155 of the Government of
India Act, 1935 or in clause (2) of Article 289 of our Constitution — they must be given, and we have
given, a restricted meaning, the context being levy of tax by one unit of Federation upon the income
of the other unit, the manifold activities carried on by Governments under our constitutional scheme,
the necessity to maintain a balance between the Centre and the States and so on.”
of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or
any income accruing or arising in connection therewith.
(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by
law declare to be incidental to the ordinary functions of government.
47
(emphasis supplied)
141. From NDMC (supra), it is clear that not every state activity resembling commerce can
be considered per se exempt from union taxation, in the context of Article 289. The court
also emphasized that mere sale or lease of government property does not imply trade or
business. The crucial or determinative element in the venture, so to say, is whether
performance of a function is actuated by profit motive.
142. What then is the true meaning of the expressions “fee, cess or consideration”? The
careful analysis of the amended proviso to Section 2(15), reveal that the prohibition applies
in a four-fold manner-
(a) The bar to engaging in trade, commerce or business,
(b) The bar to providing any service in relation to trade, commerce or business,
(c) wherein “for a fee, cess or any other consideration” is the controlling phrase for both
(a) and (b) (which are collectively referred to as “prohibited activities” for brevity)
(d) irrespective of the application of the income derived from such ‘prohibited activities’.
143. The impermissibility of any trade, or commercial activity or service, and income, from
them, was intended to be conveyed through the prohibition, in the first part of the definition
of GPU charities. The necessary implication which arises is that income (received as fee,
cess, or any other consideration) derived from such ‘prohibited activities’ is necessarily
motivated by profit. The ordinary meaning of fee or consideration would be synonymous with
something of value, usually in monetary terms. However, the use of the expression “cess”
facially lends a different colour to all the three expressions.
144. “Fee, cess and any other consideration” has to receive a purposive interpretation, in
the present context. If fee or cess or such consideration is collected for the purpose of an
activity, by a state department or entity, which is set up by statute, its mandate to collect
such amounts cannot be treated as consideration towards trade or business. Therefore,
regulatory activity, necessitating fee or cess collection in terms of enacted law, or collection
of amounts in furtherance of activities such as education, regulation of profession, etc., are
per se not business or commercial in nature. Likewise, statutory boards and authorities, who
are under mandate to develop housing, industrial and other estates, including development
of residential housing at reasonable or subsidized costs, which might entail charging higher
amounts from some section of the beneficiaries, to cross-subsidize the main activity, cannot
be characterized as engaging in business. The character of being ‘state’, and such
corporations or bodies set up under specific laws (whether by states or the centre) would,
therefore, not mean that the amounts are ‘fee’ or ‘cess’ to provide some commercial or
business service. In each case, at the same time, the mere nomenclature of the
consideration being a “fee” or “cess”, is not conclusive. If the fee or cess, or other
consideration is to provide an essential service, in larger public interest, such as water cess
or sewage cess or fee, such consideration, received by a statutory body, would not be
considered “trade, commerce or business” or service in relation to those. Non-statutory
bodies, on the other hand, which may mimic regulatory or development bodies - such as
those which promote trade, for a section of business or industry, or are aimed at providing
facilities or amenities to improve efficiencies, or platforms to a segment of business, for fee,
whether charged by subscription, or specific fee, etc, may not be charitable; when they claim
exemption, their cases would require further scrutiny.
48
145. This Court has in some decisions considered the term "cess". In Shinde Brothers Etc.
v. Deputy Commissioner, Raichur and Ors.131, Justice M. Hidyatullah, (though his was a
dissenting judgment, yet no contrary opinion was expressed by majority in regard to “cess”)
said that:
“... The word "cess" is used in Ireland and is still in use in India although the word rate has replaced
it in England. It means a tax and is generally used when the levy is for some special administrative
expense which the name (health cess, education cess, road cess etc.) indicates. When levied as an
increment to an existing tax, the name matters not for the validity of the cess must be judged of in
the same way as the validity of the tax to which it is an increment. By Schedule A(1) read with
Section 3 of the Act, it is collected as an additional levy with a tax, which, as described in Schedule
A, is undoubtedly one within the powers of the State Legislature and has been so even prior to the
Constitution....”
146. The seven-judge bench judgment of this court in India Cement Ltd. & Ors. v. State of
Tamil Nadu and Ors. 132 , approved the definition propounded by Hidayatulla, J. In
Vijayalashmi Rice Mill and Ors. v. Commercial Tax Officers, Palakol & Ors 133 this court
observed that
“13. Hence ordinarily a cess is also a tax, but is a special kind of tax. Generally tax raises revenue
which can be used generally for any purpose by the State. For instance, the income tax or excise
tax or sales tax are taxes which generate revenue which can be utilised by the Union or the State
Governments for any purpose e.g. for payment of salary to the members of the armed forces or civil
servants, police, etc. or for development programmes, etc. However, cess is a tax which generates
revenue which is utilised for a specific purpose. For instance, health cess raises revenue which is
utilised for health purposes e.g. building hospitals, giving medicines to the poor, etc. Similarly,
education cess raises revenue which is used for building schools or other educational purposes.”
147. The expression "cess", therefore, implies a tax or impost levied for some special
purpose, which may be levied as an increment to an existing tax. The term “fee”, to some
extent, has a similar meaning. In The Commissioner of Income Tax, Lucknow v. U.P. Forest
Corporation 134 this court, after considering other previous decisions, held that exaction,
through process of law, of amounts may be called “fee” but broadly are taxes:
“compulsory exaction's of money imposed for public purpose and requiring no consideration to
sustain it, but in a broad generic sense as to also include fees levied essentially for services
rendered. It is now well recognised that there is no generic difference between a tax and a fee; both
are compulsory exaction of money by public authority.”
148. At the same time, there is also authority135 for the proposition that charges (which may
be termed as “fee” in given statutes) collected by local or municipal authorities, for supply of
water, for sewerage, etc., are not “taxes”- they form consideration for the specific services,
by the concerned local authority.
149. The term “consideration” however is broader. The plain meaning is a monetary
payment, for something obtained, in the form of goods, or services. In Commissioner of
131
1967 (1) SCR 548
132
1989 (Supp 1) SCR 692
133
(2006) 6 SCC 763
134
1998 (2) SCR 22
135
See Union of India & Ors. v. State of U.P. & Ors. 2007(12) SCR 792; Union of India v. Purna Municipal Corporation
1991 (Supp 1) SCR 183; Municipal Corporation, Amritsar v. Senior Superintendent of Post Offices, Amritsar Division &
Anr. 2004 (1) SCR 913.
49
Central Excise, Mumbai v. Fiat India (P) Ltd. & Ors136 this court explained the meaning of
that term:
“Consideration means something which is of value in the eyes of law, moving from the Plaintiff,
either of benefit to the Plaintiff or of detriment to the Defendant. In other words, it may consist either
in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment,
loss or responsibility, given, suffered or undertaken by the other, as observed in the case of Currie
v. Misa (1875) LR 10 Ex. 153.
54. Webster's Third New International Dictionary (unabridged) defines, consideration thus:
‘Something that is legally regarded as the equivalent or return given or suffered by one for the act
or promise of another.’
55. In volume 17 of Corpus Juris Secundum (p.420-421 and 425) the import of 'consideration'
has been described thus:
‘Various definitions of the meaning of consideration are to be found in the text-books and judicial
opinions. A sufficient one, as stated in Corpus Juris and which has been quoted and cited with
approval is "a benefit to the party promising or a loss or detriment to the party to whom the promise
is made.....
At common law every contract not under seal requires a consideration to support it, that is, as shown
in the definition above, some benefit to the promisor, or some detriment to the promisee.’
56. In Salmond on Jurisprudence, the word 'consideration' has been explained in the following
words.
A consideration in its widest sense is the reason, motive or inducement, by which a man is moved
to bind himself by an agreement. It is for nothing that he consents to impose an obligation upon
himself, or to abandon or transfer a right. It is in consideration of such and such a fact that he agrees
to bear new burdens or to forego the benefits which the law already allows him.
57. The gist of the term 'consideration' and its legal significance has been clearly summed up in
Section 2(d) of the Indian Contract Act which defines 'consideration' thus:
‘When, at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such
act or abstinence or promise is called a consideration to the promise.’
58. From a conspectus of decisions and dictionary meaning, the inescapable conclusion that
follows is that 'consideration' means a reasonable equivalent or other valuable benefit passed on by
the promisor to the promisee or by the transferor to the transferee. Similarly, when the word
'consideration' is qualified by the word 'sole', it makes consideration stronger so as to make it
sufficient and valuable having regard to the facts, circumstances and necessities of the case.”
150. Therefore, what Parliament intended – through the amendments in question was to
proscribe, involvement or engagement of GPU charities, from any form (“in the nature of”)
of activities that were trade, business or commerce, or engage or involve in providing
services in relation to trade, business or commerce- for a fee, cess or other consideration.
The inclusion of the term “in the nature of” was by design, to clarify beyond doubt, that not
only business, trade or commerce, but all activities in the nature of, or resembling them,
were proscribed. Likewise, service in relation to such activities, i.e., services relating, or
pertaining to, such proscribed activities, too were forbidden.
151. The reference to fee or cess, is in the opinion of the court, only to emphasize that even
a statutory consideration, for a service to business, trade or commerce, would take the
activity outside the definition of a GPU charity. The sense in which the expressions “cess,
136
2012(12) SCR 975
50
fee or other consideration” are used, is that if any amount, is received for trading, or business
or commercial activity, or any services to such activity, then, notwithstanding their
nomenclature (as fee or cess, i.e. that they are fixed under a law) the GPU charity cannot
claim tax exempt status. To bring home this even more pointedly- and underline a break
from the past, the application of such amounts (received in the course of trade, commerce,
or business, or towards services in relation thereto) would be irrelevant, as evidenced by the
term “irrespective”, in the fourth limb of reading Section 2(15).
Summation of interpretation of Section 2(15)
152. Section 2(15) - in the wake of its several amendments between 2008 and 2015 - can
be juxtaposed with the interpretation of the unamended Section 2(15) by this Court. In Surat
Art Silk (supra), the principle enunciated was that so long as the predominant object of GPU
category charity is charitable, its engagement in a non-charitable object resulting in profits
that are incidental, is permissible. The court also declared that profits and gains from such
activities which were non-charitable had to be deployed or “fed” back to achieve the
dominant charitable object.
153. The paradigm change achieved by Section 2(15) after its amendment in 2008 and as
it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of
trade, commerce, business or any service in relation to such activities for any consideration
(including a statutory fee etc.). This is emphasized in the negative language employed by
the main part of Section 2(15). Therefore, the idea of a predominant object among several
other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso
which carves out the condition by which otherwise prohibited activities can be engaged in
by GPU charities. The conditions are:
(a) That such activities in the nature of trade, commerce, business or service (in relation
to trade, commerce or business for consideration) should be in the course of “actual carrying
on” of the GPU object, and
(b) The quantum of receipts from such activities should be exceed 20% of the total
receipts.
(c) Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-
given the conscious use of “or” connecting the two of them. This means that if a charitable
trust carries on any activity in the nature of business, trade or commerce, in the actual course
of fulfilling its objectives, the income from such business, should not exceed the limit defined
in sub-clause (ii) to the proviso.
C. Sections 10, 11, 12, 12A, 12AA and 13 of the IT Act
154. The effect of Sections 11, 12, 12A 12AA and 13 have been the subject of certain
decisions137 of this court. These decisions have noticed that Section 11 deals with income
from trusts for charitable and religious purposes and sets out which shall be subject to tax.
Section 11(1) relates to application of income towards the objects of the trust and exempts
income of trusts with objects wholly charitable or religious, or parts of income which relate
to such objects. Section 11(1-A) provides for exemption of capital gains derived by trusts.
Section 11(1B), speaks of failure to apply income as per option under Explanation (2) to
Section 11(1). Section 11(2) relates to setting apart or accumulation of income. Section
11(3) deals with consequences of misapplication of income or improper investment, while
137
Commissioner of Income Tax v. Dawoodi Bohara Jamat, (2014) 16 SCC 222; S.RM.M.CT.M. Tiruppani Trust v.
Commissioner of Income Tax, (1998) 2 SCC 584
51
Section 11(3-A) relates to modification of purposes specified in Form 10 under Section
11(2). Sections 11(4) and 11(4-A) relate to business income of charitable trusts. Lastly,
Section 11(5) provides for the prescribed modes of investment in regard to the said trusts.
Section 12 enacts that income of trusts created wholly for charitable or religious purpose
from voluntary contributions would be deemed as income from the property held under such
trust for the purposes of Sections 11 and 13 of the Act. Section 12-A prescribes the
conditions for applicability of Sections 11 and 12 of the Act. It enacts two essential conditions
which are to be satisfied by a charitable or religious trust for claiming exemption under those
sections: firstly, that the person in receipt of the income has made an application for
registration of the trust on or after 01.06.2007 in the prescribed form and manner to the
Commissioner and such a trust is registered under Section 12-AA and secondly, where the
total income of the trust exceeds the maximum amount which is not chargeable to income
tax in any previous year, the accounts of the trust must be audited by a chartered accountant
and the person in receipt of the income should furnish such audit report in the prescribed
form along with the return of income. The procedure for grant (or refusal) of registration is
prescribed by Section 12AA. Section 13 enlists the circumstances under which tax
exemption is unavailable to religious or charitable trusts otherwise falling under Sections 11
or 12. Section 13 therefore, has to be read with the provisions of Sections 11 and 12 for
deciding eligibility of a trust’s claim for exemption.
Distinction between business held under Trust [Section 11(4)] and Trust carrying on
business [Section 11(4A)]
155. Section 11(4) applies to cases where the business undertaking itself is the property
held by a trust. Thus, where the property held in trust, or where property settled by the donor
or trust creator in favour of the trustees itself is a business undertaking, then the income
from such an undertaking is covered by Section 11(4). Section 11(4A) operates differently.
It is applicable to cases where the trust carries on a business. Section 11(4A) states that
when a trust carries on a business, unless the business is incidental or ancillary to the
attainments of the objectives of the trust, it would be disentitled to an exemption under
Section 11(1). It imposes a further condition that separate books of accounts need to be
maintained in such cases.
156. Section 11(1) confers an exemption from tax only where the property itself is held
under a trust or other legal obligation. It does not apply to cases where a trust or legal
obligation is not created on any property, but only the income derived from any particular
property or source is set apart and charged for a charitable or religious purpose. Similarly,
when a business itself has been set aside for the objects of the trust, then such business is
held under trust and will fall under sub-section (4). However, where the profits of a business
of a trust are applied for charitable purposes, then such business and trust will be governed
by sub-section (4A).
157. Section 11(1) of the Act exempts income derived from property held under trust wholly
for charitable or religious purposes, to the extent to which such income is applied to such
purposes in India. The Act does not comprehensively define "property held under trust".
Section 11(4) however, provides that for the purposes of Section 11, the words "property
held under trust" "includes a business undertaking so held". Section 11(4A) as amended by
the Finance (No. 2) Act, 1991 w.e.f. 01.04.1992 reads as under:-
"(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in
relation to any income of a trust or an institution, being profits and gains of business, unless the
business is incidental to the attainment of the objectives of the trust or, as the case may be,
52
institution, and separate books of account are maintained by such trust or institution in respect of
such business."
158. The question whether Section 11(4A) applies where a business is held under trust
was answered in the negative in earlier High Court judgments. The general provision under
Section 4(3)(i) of the old Act exempted income derived from property held under trust from
taxation. Section 4(3)(ia) however, enacted that any income derived from a business carried
on behalf of a religious or charitable trust would be entitled to exemption only if the business
was carried on in the course of carrying out of a primary purpose of the trust or the work in
connection with the business is mainly carried on by the beneficiaries of the trust. The
revenue contended there that since clause (ia) was a special provision dealing with
exemption in respect of a business carried on for and on behalf of a trust, any claim for
exemption as regards the profits of such business can be made only under that provision,
and if conditions laid down therein are not satisfied, the assessee cannot rely upon the
general provision contained in Section 4(3)(i) to claim exemption thereunder on the ground
that business is property. In Gadodia Swadeshi Stores v. Commissioner of Income Tax,
Punjab138, the Lahore High Court held that the fact that the business carried on behalf of the
trust failed to satisfy the two conditions in Section 4(3)(ia) was no reason for it be denied
exemption if it fell within Section 4(3)(i). The court held that that the two categories
mentioned in the two clauses did not exclude each other.
159. This judgment of the Lahore High Court was approved- by reference by this court in
J.K. Trust v. CIT139 which was followed in Krishna Warriar (supra). By then the content of
Section 4(3)(ia) had been enacted as a proviso to clause (i) of Section 4(3), by amending
Act of 1953. After referring to the judgment of the Lahore High Court (supra) and rejecting
the argument of the revenue that a proviso in a statute be always read as limitation upon the
effect of the main enactment Subbarao, J. in Krishna Warriar (supra) observed as under:
“........But it is not an inflexible rule of construction that a proviso in a statute should always be read
as a limitation upon the effect of the main enactment. Generally the natural presumption is that but
for the proviso the enacting part of the section would have included the subject-matter of the proviso;
but the clear language of the substantive provision as well as the proviso may establish that the
proviso is not a qualifying clause of the main provision, but is in itself a substantive provision. In the
words of Maxwell, "the true principle is that the sound view of the enacting clause, the saving clause
and the proviso taken and construed together is to prevail". So construed we find no difficulty, as
we will indicate later in our judgment, in holding that the said clause (b) of the proviso deals with a
case of business which is not vested in trust for religious or charitable purposes within the meaning
of the substantive clause of section 4(3)(i).”
160. Therefore, to summarise on the legal position on this - if a property is held under trust,
and such property is a business, the case would fall under Section 11(4) and not under
Section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the
business is not held under trust. There is a difference between a property or business held
under trust and a business carried on by or on behalf of the trust. This distinction was
recognized in Surat Art Silk (supra), which observed that if a business undertaking is held
under trust for a charitable purpose, the income from it would be entitled to exemption under
Section 11(1) of the Act.
161. The interface between Sections 11(1) and (4) is of some importance. Firstly, under
Section 11(4), it is only the business which is held under the trust that would enjoy exemption
138
See Gadodia Swadeshi Stores v. Commissioner of Income Tax, Punjab, (1944) 12 ITR 385
139
1958 (1) SCR 65
53
in respect of its income under Section 11(1). Secondly, there is a distinction between the
objects of a trust and the powers given to the trustees to effectuate the purposes of the trust.
In this regard, the observations of this court, in J.K. Trust (supra) assume relevance. There,
one of the questions which arose was whether the office of managing agency, which was an
office of profit, was in fact settled upon trust and, therefore, could be considered to be
business held under trust. The court held that for the purposes of Section 4(3)(i) of the 1922
Act, the office of managing agency was property which could be held under trust. The
revenue pointed out that on the terms of the trust deed previously executed by the settlors
(on 15.06.1945), the properties which the trustees are to hold and stand possessed of, were
only the sum of ₹1,00,000/-, any donations and contribution received by the trustees and all
accretions thereto, and investment in securities made from time to time representing the
accretions. It was contended that on the terms of the trust deed, the managing agency which
was acquired on 10.09.1945 for a period of 20 years, cannot be said to be property held
under trust since no part of the initial amount of ₹1,00,000/-, which was settled upon the
trust, was utilised in the acquisition of the managing agency, so as to impress it with the
character of accretion. While repelling this contention, this court held that:
“.......But it is to be observed that clause (3) of the trust deed expressly provides for the acquisition
of the business of managing agency on behalf of the trust and "with the help of the trust fund" and
that precisely is what has happened and indeed, reading together Exhibits A and B, it is impossible
to resist the conclusion that both the documents formed part of an integral scheme, and that what
the settlors had in view in clause 3 of Exhibit A is the very managing agency, which was acquired
under Exhibit B. There is considerable authority in England that when trustees carry on business
with the aid of trust fund, the position in law is the same as if they actually employed it in the
business, though, in fact, it be not actually invested therein.”
162. It seems that the test applied in J.K. Trust (supra) that for a business, to be considered
as property held under trust, it should have been either acquired with the help of the fund
originally settled upon trust or the original fund settled upon trust must have a proximate
connection with the later acquisition or carrying on of the business by the trustees. This
distinction between a business held and carried on by a trust, or a trust business run by the
trustees, was noticed, in Thiagesar Dharma Vanikam v. CIT140 by the Madras High Court
and in Raja P.C. Lall Choudhary v. CIT, Bihar & Orissa141 by the Patna High Court which
held similarly in relation to Section 4(3)(i) of the Act of 1922 (which corresponds to Section
11(1) of the 1961 Act).
163. What has to be examined, therefore, is whether the business itself is held under trust
or is carried on by and on behalf of the trust. Importantly Section 11(1) of the Act starts with
the expression "subject to the provisions of Sections 60 to 63........". Those provisions are in
Chapter V of the Act. Section 60 provides for the consequences of a transfer of income
where there is no transfer of assets. It says that where a person transfers merely the income
from an asset without transferring the asset itself, he would continue to be chargeable to
income tax. Section 61 provides for the consequences of a revocable transfer of assets and
says that the same would be the position where a person is in receipt of income by virtue of
a revocable transfer of assets. Section 62 provides for the consequences of a transfer of
assets for a specified period, and serves as an exception to Section 61. An assessee has to
be divested of the asset before ceasing to be assessable in respect of the income from it. A
mere direction that the income from the business shall be applied to the charitable objects
140
(1963) 50 ITR 798 Madras
141
(1957) 31 ITR 226 Patna.
54
of a trust, without there being a settlement of the business itself upon trust, does not result
in any trust or legal obligation.
164. It is now, necessary to consider Thanthi Trust (supra) and its context. This court, while
interpreting Section 11(4A) (as amended w.e.f. 01.04.1992) stated that the provision
requires the “business income of a trust or institution to be exempt is that the business should
be incidental to the attainment of objectives of the trust or institution”.
165. The above observations have to be understood in the light of the facts before the
court. Thanthi Trust carried on newspaper business which was held under trust. The
charitable object of the trust was the imparting of education - which falls under Section 2(15)
of the Act. The newspaper business was incidental to the attainment of the object of the
trust, namely that of imparting education. This aspect is important, because the aim of the
trust was a per se charitable object, not a GPU object. The observations were therefore
made, having regard to the fact that the profits of the newspaper business were utilized by
the trust for achieving the object of education. In the light of such facts, the carrying on of
newspaper business, could be incidental to the object of education- a per se category. The
Thanthi Trust (supra) ratio therefore, cannot be extended to cases where the trust carries
on business which is not held under trust and whose income is utilized to feed the charitable
objects of the trust.
166. What then is the interpretation of the expression “incidental” profits, from “business”
being “incidental to the attainment of the objectives” of the GPU charity (which occurs in
Section 11(4A))? As stated earlier, the interpretation of that expression in Thanthi Trust
(supra) was in the context of a per se charity, i.e., where the trust’s object was education.
However, the restrictive or negative terms enjoining GPU charities from carrying on profitable
activity had been deleted in 1983 (w.e.f. 01.04.1984). In Surat Art Silk (supra), the court had
articulated the determinative test for defining whether a Trust was a GPU charity if its
predominant object was to carry out a charitable purpose and that if that was the case, the
fact that it earned profit would not per se deprive it of tax exemption. This decision was
interpreted in the context of Section 11(4A) by this court in Thanthi Trust, to hold that
business can be incidental to attainment of the trust’s objects.
167. Thus, the journey which began with Surat Art Silk was interpreted in Thanthi Trust to
mean that the carrying on of business by GPU charity was permissible as long as it inured
to the benefit of the trust. The change brought about by the amendments in questions,
however, place the focus on an entirely different perspective: that if at all any activity in the
nature of trade, commerce or business, or a service in the nature of the same, for any form
of consideration is permissible, that activity should be intrinsically linked to, or a part of the
GPU category charity’s object. Thus, the test of the charity being driven by a predominant
object is no longer good law. Likewise, the ambiguity with respect to the kind of activities
generating profit which could feed the main object and incidental profit-making also is not
good law. What instead, the definition under Section 2(15) through its proviso directs and
thereby marks a departure from the previous law, is – firstly that if a GPU charity is to engage
in any activity in the nature of trade, commerce or business, for consideration it should only
be a part of this actual function to attain the GPU objective and, secondly – and the equally
important consideration is the imposition of a quantitative standard - i.e., income (fees, cess
or other consideration) derived from activity in the nature of trade, business or commerce or
service in relation to these three activities, should not exceed the quantitative limit of
₹10,00,000 (w.e.f. 01.04.2009), ₹25,00,000 (w.e.f. 01.04.2012), and 20% (w.e.f.
01.04.2016) of the total receipts. Lastly, the “ploughing” back of business income to “feed”
55
charity is an irrelevant factor – again emphasizing the prohibition from engaging in trade,
commerce or business.
168. If one understands the definition in the light of the above enunciation, the sequitur is
that the reference to “income being profits and gains of business” with a further reference to
its being incidental to the objects of the Trust, cannot and does not mean proceeds of
activities incidental to the main object, incidental objects or income derived from incidental
activities. The proper way of reading reference to the term “incidental” in Section 11(4A) is
to interpret it in the light of the sub-clause (i) of proviso to Section 2(15), i.e., that the activity
in the nature of business, trade, commerce or service in relation to such activities should be
conducted actually in the course of achieving the GPU object, and the income, profit or
surplus or gains can then, be logically incidental. The amendment of 2016, inserting sub
clause (i) to proviso to Section 2(15) was therefore clarificatory. Thus interpreted, there is
no conflict between the definition of charitable purpose and the machinery part of Section
11(4A). Further, the obligation under Section 11(4A) to maintain separate books of account
in respect of such receipts is to ensure that the quantitative limit imposed by sub-clause (ii)
to Section 2(15) can be computed and ascertained in an objective manner.
169. The conclusion recorded above is also supported by the language of seventh
proviso142 to Section 10(23C). Whereas Section 2(15) is the definition clause, Section 10
lists out what is not income. Section 10(23C) – by sub-clauses (iv) and (v) exempt incomes
of charitable organisations. Such organisations and institutions are not limited to GPU
category charities but rather extend to other types of charities (i.e. the per se kind as well).
The controlling part of Section 10(23C) along with the relevant clauses (iv) and (v) seek to
exclude income received by the concerned charities. However, the provisos hedge such
exemption with conditions. The seventh proviso - much like Section 11(4A) and the definition
- carve out an exception, to the exemptions such that income derived by charities from
business, are not exempt. The seventh proviso virtually echoes Section 11(4A) in that
business income derived by a charity (in the present case, the GPU charities) which arises
from an activity incidental to the attainment of its objective is not per se excluded.
170. Classically, the idea of charity was tied up with eleemosynary143. However, “charitable
purpose” – and charity as defined in the Act have a wider meaning where it is the object of
the institution which is in focus. Thus, the idea of providing services or goods at no
consideration, cost or nominal consideration is not confined to the provision of services or
goods without charging anything or charging a token or nominal amount. This is spelt out in
Indian Chamber of Commerce (supra) where this Court held that certain GPUs can render
services to the public with the condition that they would not charge “more than is actually
needed for the rendering of the services, - may be it may not be an exact equivalent, such
mathematical precision being impossible in the case of variables, - may be a little surplus is
left over at the end of the year – the broad inhibition against making profit is a good guarantee
that the carrying on of the activity is not for profit”.
171. Therefore, pure charity in the sense that the performance of an activity without any
consideration is not envisioned under the Act. If one keeps this in mind, what Section 2(15)
emphasizes is that so long as a GPU’s charity’s object involves activities which also
142
“Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) shall apply in
relation to any income of the fund or trust or institution or any university or other educational institution or any hospital or other
medical institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and
separate books of account are maintained by it in respect of such business:”
143
Providing relief from distress to humans based on Christian values - refer to Director of Income Tax v. Bharat Diamond Bourse
(2002) 10 SCC 392, and Bangalore Water Supply and Sewage Undertaking v. A Rajappa (1978) 2 SCC 213.
56
generates profits (incidental, or in other words, while actually carrying out the objectives of
GPU, if some profit is generated), it can be granted exemption provided the quantitative limit
(of not exceeding 20%) under second proviso to Section 2(15) for receipts from such profits,
is adhered to.
172. Yet another manner of looking at the definition together with Sections 10(23) and 11
is that for achieving a general public utility object, if the charity involves itself in activities,
that entail charging amounts only at cost or marginal mark up over cost, and also derive
some profit, the prohibition against carrying on business or service relating to business is
not attracted - if the quantum of such profits do not exceed 20% of its overall receipts.
173. It may be useful to conclude this section on interpretation with some illustrations. The
example of Gandhi Peace Foundation disseminating Mahatma Gandhi’s philosophy (in
Surat Art Silk) through museums and exhibitions and publishing his works, for nominal cost,
ipso facto is not business. Likewise, providing access to low-cost hostels to weaker
segments of society, where the fee or charges recovered cover the costs (including
administrative expenditure) plus nominal mark up; or renting marriage halls for low amounts,
again with a fee meant to cover costs; or blood bank services, again with fee to cover costs,
are not activities in the nature of business. Yet, when the entity concerned charges
substantial amounts- over and above the cost it incurs for doing the same work, or work
which is part of its object (i.e., publishing an expensive coffee table book on Gandhi, or in
the case of the marriage hall, charging significant amounts from those who can afford to pay,
by providing extra services, far above the cost-plus nominal markup) such activities are in
the nature of trade, commerce, business or service in relation to them. In such case, the
receipts from such latter kind of activities where higher amounts are charged, should not
exceed the limit indicated by proviso (ii) to Section 2(15).
174. The insertion of Section 13(8)144, the seventeenth proviso to Section 10(23C) and third
proviso to Section 143(3) (all of which were inserted by Finance Act, 2012, but w.r.e.f.
01.04.2009), further reinforces the interpretation of this Court, of “charitable purpose”. These
provisions, form the machinery to control the conditions under which income is exempt. The
effect of the seventeenth proviso to Section 10(23C) is to impose the same condition i.e.,
that that the trade, commerce or business activity or service relating to trade, business or
commerce, should be part of the GPU’s activities, to achieve its object of advancing general
public utility. The other condition– which is drawn in as part of the exemption condition, is
that if such trading or commercial activity takes place the receipts should be confined to a
prescribed percentage of the overall receipts. Section 13(8) too reinforces the same
condition.
175. In the opinion of this court, the change intended by Parliament through the amendment
of Section 2(15) was sought to be emphasised and clarified by the amendment of Section
10(23C) and the insertion of Section 13(8). This was Parliaments’ emphatic way of saying
that generally no commercial or business or trading activity ought to be engaged by GPU
charities but that in the course of their functioning of carrying out activities of general public
utility, they can in a limited manner do so, provided the receipts are within the limit spelt out
in Clause (ii) of the proviso to Section 2(15).
144
“(8) Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous
year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of
such person in the said previous year.”
57
D. What kinds of income or receipts may not be characterized as derived from trade,
commerce, business or in relation to such activities, for a consideration
(i) Statutory corporations, authorities or bodies
176. It would be essential now to deal with certain kinds of receipts which GPU charities,
typically statutory housing boards, regulatory authorities and corporations may be entitled
to, if mandated to collect or receive. During the course of hearing, learned counsels
highlighted that statutory boards, and corporations have to recover the cost of providing
essential goods and services in public interest, and also fund large scale development and
maintain public property. These would entail recovering charges or fees, interest and also
receiving interest for holding deposits. It was further pointed out that in some cases, income
in the form of rents – having regard to the nature of the schemes which the concerned board,
trust or corporation may be mandated or permitted to carry on, has to be received. For
instance, in some situations, for certain kinds of properties, the boards may be permitted
only to lease out their assets and receive rents.
177. The answers to these, in the opinion of this court, are that the definition ipso facto
does not spell out whether certain kinds of income can be excluded. However, the reference
to specific provisions enabling or mandating collection of certain rates, tariffs or costs would
have to be examined. Generically, going by statutory models in enactments (under which
corporations boards or trust or authority by whatsoever name, are set up), the mere fact that
these bodies have to charge amounts towards supplying goods or articles, or rendering
services i.e., for fees for providing typical essential services like providing water, distribution
of food grains, distribution of medicines, maintenance of roads, parks etc., ought not to be
characterized as “commercial receipts”. The rationale for such exclusion would be that if
such rates, fees, tariffs, etc., determined by statutes and collected for essential services, are
included in the overall income as receipts as part of trade, commerce or business, the
quantitative limit of 20% imposed by second proviso to Section 2(15) would be attracted
thereby negating the essential general public utility object and thus driving up the costs to
be borne by the ultimate user or consumer which is the general public. By way of illustration,
if a corporation supplies essential food grains at cost, or a marginal mark up, another
supplies essential medicines, and a third, water, the characterization of these, as activities
in the nature of business, would be self-defeating, because the overall receipts in some
given cases may exceed the quantitative limit resulting in taxation and the consequent higher
consideration charged from the user or consumer.
(a) Interpretation of Section 10(46) and Section 2(15)
178. Section (20A) was inserted by Finance Act, 1970 with effect from 01.04.1962. It had
excluded certain classes of income, of corporations145. This court had occasion to deal with
the provision while it was in force in the GIDC case (supra) . The court had then emphasized
that the expression “development” in Section 10(20A) should be understood widely; thus, all
development programmes “relating to any industry” fell within the purview of “development”.
The court also highlighted that nothing in the IT Act laid down how a corporation could be
145
Incomes not included in total income.
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall
not be included-
xxxxxx xxxxxx xxxxxx
(20A) any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and
satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and
villages, or for both.
58
termed as a development corporation nor was there anything mandating that fee chargeable
by such corporations was confined to non-industrial activities.
179. The decision in Gujarat Maritime Board case (supra) was rendered in the context of
Section 10(20). That provision exempts income accruing to local authorities, from taxation.
By Finance Act, 2002, an Explanation was added to Section 10(20) which defined “local
authority” retrospectively. The Board ceased to enjoy exemption which it had hitherto, in the
absence of the retrospective definition. It, therefore sought exemption, as a GPU category
charity claiming that it was controlled by objects of general public utility having regard to the
provisions of its parent Act, i.e., the Gujarat Maritime Board Act. This court refuted the
argument of the revenue that if a corporation did not fall within the definition of “local
authority” it could not claim to be a GPU charity. It was held that Section 10(20) and Section
11 of the 1961 Act operate in totally different spheres. Even if the Board is not considered
as a local authority, it is not precluded from claiming exemption under Section 11(1) of the
1961 Act. Therefore, the court read Section 11(1) in light of the definition of the words
“charitable purposes” as defined under Section 2(15). This court also relied upon the ruling
in CIT v. APSRTC (supra) where the APSRTC – constituted under the Road Transport
Corporation Act, 1950 – having regard to the objectives of the Act, was held to be a GPU
charity, thus entitling it to exemption in terms of the IT Act.
180. In the light of these decisions, it is evident that the revenue’s narrow construction by
which tax exemption is denied on the ground that if an entity is not covered by Section
10(20A) – or the newly applicable Section 10(46), it cannot claim benefit as a GPU charity
under Section 11, is unsound. These two provisions confer different though overlapping
benefits. If an entity does not fulfil the requirement of one provision because it does not
answer the description of a body under that provision, that ipso facto is not a bar for it to
claim benefit of another provision.
181. Section 10(46) re-incarnated so to say Section 10(20A), which had been deleted w.e.f.
01.04.2003. This provision, i.e., Section 10(46) was inserted with effect from 01.04.2009
retrospectively by the Finance Act, 2011146. The conditions for applicability of Section 10(46),
i.e., that specified income or a class of specified income of ports, trusts or commissions, etc.,
established or constituted by or under Central or State enactments with the object of
regulating or administering any activity in the general public, is on similar lines as in the case
of GPU charities. Like in the case of GPU charities, there is a prohibition by Section 10(46)(b)
against such corporations, etc. engaging in commercial activity. This restriction has been
introduced for the first time [as that prohibition was absent in the now repealed Section 10
(20A)].
182. The term “commercial” is closely similar to, if not identical, with the phrase “in the
nature of trade, commerce or business.” The other condition in Section 10(46) is that the
specified income to be exempted, is to be notified by the Central Government in the Official
Gazette. Facially the allusion to commercial activity, appears to be in the nature of a
146
Incomes not included in total income.
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not
be included-
xxxxxx xxxxxx xxxxxx
(46) any specified income arising to a body or authority or Board or Trust or Commission (by whatever name called) or a class,
thereof which-
(a) has been established or constituted by or under a Central, State or Provincial Act, or constituted by the Central Government
or a State Government, with the object of regulating or administering any activity for the benefit of the general public;
(b) is not engaged in any commercial activity; and
(c) is notified by the Central Government in the Official Gazette for the purposes of this clause.
59
complete bar to activities which are akin to commerce or business, yielding profit. However,
what needs to be kept in mind is that the object of Section 10 is to remove from the taxable
net, an entire class of receipts of income. Given this object of Section 10, the interpretation
of “commercial” activity has to be on the same lines as in the case of income derived by
GPU charities, in the course of their actual functioning, by involving in activities in the nature
of trade, commerce or business. Thus, if statutory corporations within Section 10(46) derive
their income by charging a nominal mark-up over the cost of service rendered or goods
supplied, meant to recover the costs of the activities they engage in primarily or to achieve
the object for which they were set up, such as development of housing, road infrastructure,
water supply, sewage treatment, supply of food grains, medicines, etc., with or without
regulatory powers, the mere fact that some surplus or gain is derived would not disentitle
them from the benefit of Section 10(46).
183. In this context, it would be useful to consider the judgment of the Delhi and Allahabad
High Courts in Greater Noida Industrial Development Authority v. Union of India147 (hereafter
“GNIDA”) and CIT v. Yamuna Expressway Industrial Development Authority148. In GNIDA
(supra), the High Court drew a distinction between bodies set up by the government with
commercial purpose and objects – which are motivated by profit, and other government
bodies. The court held, correctly so – that other government bodies are not entitled to
exemption as they are motivated by profit. Then, dealing with the term “commercial activity”
under Section 10(46), it was held that the decisive test is whether the activities for which
consideration in the form of fee, service charge etc., is collected, is “intrinsically associated,
connected and had minimum nexus with the object of regulating and administering the
activity for the benefit of the public”.
184. It was also held that if the activity is not carried on commercial lines, i.e., with the profit
motive in mind, but the body is assigned an administrative role, having regard to the objects
of the controlling statute or law, exemption cannot be denied under Section 10(46). As
juxtaposed, activities for profit or activities which clearly were motivated by profit – carried
on by government or statutory bodies, cannot avail of exemption. The judgment in Yamuna
Industrial Development Authority (supra) is along the similar lines.
185. As far as boards and corporations which are tasked with development of industrial
areas, by statute, the judgments of this court, in Shri Ramtanu Cooperative Housing Society
(supra) and Gujarat Industrial Development Corporation (supra) have declared that these
bodies are involved in ‘development’ and are not essentially engaged in trading. In Shri
Ramtanu Cooperative Housing Society (supra) this court, by a five judge bench, held that
the Maharashtra Industrial Development Corporation is not a trading concern, and observed
as follows:
“These features of transfer of land, or borrowing of moneys or receipt of rents and profits will by
themselves neither be the indicia nor the decisive attributes of the trading character of the
Corporation. Ordinarily, a Corporation is established by shareholders with their capital. The
shareholders have their Directors for the regulation and management of the Corporation Such a
Corporation set up by the shareholders carries on business and is intended for making profits. When
profits are earned by such a Corporation they are distributed to shareholders by way of dividends
or kept in reserve funds. In the present case, these attributes of a trading Corporation are absent.
The Corporation is established by the Act for carrying out the purposes of the Act. The purposes of
the Act are development of industries in the State. The Corporation consists of nominees of the
State Government, State Electricity Board and the Housing Board. The functions and powers of the
147
(2018) 406 ITR 418 (hereafter “GNIDA”)
148
(2017) 395 ITR 18
60
Corporation indicate that the Corporation is acting as a wing of the State Government in establishing
industrial estates and developing industrial areas, acquiring property for those purposes,
constructing buildings, allotting buildings, factory sheds to industrialists or industrial undertakings. It
is obvious that the Corporation will receive moneys for disposal of land, buildings and other
properties and also that the Corporation would receive rents and profits in appropriate cases.
Receipts of these moneys arise not out of any business or trade but out of sole purpose of
establishment, growth and development of industries.
17. The Corporation has to provide amenities and facilities in industrial estates and industrial areas.
Amenities of road, electricity, sewerage and other facilities in industrial estates and industrial areas
are within the programme of work of the Corporation. The found of the Corporation consists of
moneys received from the State Government, all fees, costs and charges received by the
Corporation, all moneys received by the Corporation from the disposal of lands, buildings and other
properties and all moneys received by the Corporation by way of rents and profits or in any other
manner. The Corporation shall have the authority to spend such sums out of the general funds of
the Corporation or from reserve and other funds. The Corporation is to make provision for reserve
and other specially denominated funds as the State Government may direct. The Corporation
accepts deposits from persons, authorities or institutions to whom allotment or sale of land,
buildings, or sheds is made or is likely to be made in furtherance of the object of the Act. A budget
is prepared showing the estimated receipts and expenditure. The accounts of the Corporation are
audited by an auditor appointed by the State Government. These provisions in regard to the finance
of the Corporation indicate the real role of the Corporation viz. the agency of the Government in
carrying out the purpose and object of the Act which is the development of industries. If in the
ultimate analysis there is excess of income over expenditure that will not establish the trading
character of the Corporation. There are various departments of the Government which may have
excess of income over expenditure.
************** ******** *********
20. The underlying concept of a trading Corporation is buying and selling. There is no aspect of
buying or selling by the Corporation in the present case. The Corporation carries out the purposes
of the Act, namely, development of industries in this State. The construction of buildings, the
establishment of industries by letting buildings on hire or sale, the acquisition and transfer of land in
relation to establishment of industrial estate or development of industrial areas and of setting up of
industries cannot be said to be dealing in land or buildings for the obvious reason that the State is
carrying out the objects of the Act with the Corporation as an agent in setting up industries in the
State. The Act aims at building an industrial town and the Corporation carries out the objects of the
Act. The hard core of a trading Corporation is its commercial character. Commerce connotes
transactions of purchase and sale of commodities, dealing in goods. The forms of business
transactions may be varied but the real character is buying and selling. The true character of the
Corporation in the present case is to act as an architectural agent of the development and growth
of industrial towns by establishing and developing industrial estates and industrial areas. We are of
opinion that the Corporation is not a trading one.”
186. In Shri Ramtanu Cooperative Housing Society (supra) no doubt, this court did not
have to decide whether the Maharashtra Industrial Development Corporation was entitled to
tax exemption. However, it examined the provisions of the Act, and the ratio, that such
industrial development corporations are not engaged in trading, is binding. Like in that case,
here too, the concerned state Acts (Gujarat Industrial Development Act, 1962 and the
Karnataka Industrial Areas Development Act, 1966) tasked the boards with planning and
development of industrial areas. Their personnel are appointed under the enactments and
are deemed to be public servants. The state government is empowered to acquire land, in
exercise of eminent domain power, for their purposes; their audits are by the Accountant
General of the concerned state, or auditors appointed by the state. They are authorized by
law, to levy rates and charges, for the services they provide, on pre-determined basis. In the
61
light of these provisions, clearly, these boards and authorities perform objects of general
public utility; and they are not driven by profit motive.
187. There is a two-fold distinction between the now-deleted Section 10(20A) and the newly
added Section 10(46) (w.e.f. 01.06.2011). Firstly, that the erstwhile Section 10(20A) applied
to a limited class of undertaking i.e., the bodies, or corporations, constituted by or under any
law-confined to the planning and development of housing infrastructure. However, the newly
added Section 10(46) is wider in comparison and the activities of any body or authority or
board constituted by or under any central or State Act with “the object of regulating or
administering any activity for the benefit of the general public”, has broader import. In a
sense, the newly added Section 10(46), resembles a GPU category charity classified under
Section 2(15). The second distinction is that Section 10(20A) did not bar any board, or
corporations, etc. from indulging in commercial activities. However, sub-clause (b) of Section
10(46) imposes such a bar, and the concerned body cannot claim tax exemption if it engages
in commercial activity.
188. The manner in which GPU charities has been dealt with under the definition clause,
i.e., Section 2(15), indicates that even though trading or commercial activity or service in
relation to trade, commerce or business appears to be barred – nevertheless the ban is lifted
somewhat by the proviso which enables such activities to be carried out if they are
intrinsically part of the activity of achieving the object of general public utility. Furthermore,
in the case of GPU charities there is a quantified limit of the overall receipts, which is
permissible from such commercial activity. In the case of local authorities and corporations
covered by Section 10(46) no such activities are seemingly permitted.
189. As was observed in the earlier part of this judgment – while considering whether for
the period 01.0.2003 - 31.05.2011, statutory boards, corporations, etc. could have lawfully
claimed to be GPU charities, this court has observed that the nature of such corporations is
not to generate profit but to make available goods and other services for the benefit of public
weal. If such corporations (falling within the description of Section 10(46)) applied to the
Central Government for exemption, the treatment of their receipts, should be no different
than how such receipts can and should have been treated for the purposes of determining
whether they are GPU charities, during the period when Section 10(46) was not in existence.
Furthermore, this court is of the opinion that having regard to the observations in Gujarat
Maritime Board case (supra), the denial of exemption under one category cannot debar such
corporations from claiming income exempt status under another category.
(b) Summary in relation to statutory authorities/corporations
190. In light of the above discussion, this court is of the opinion that:
(i) The fact that bodies which carry on statutory functions whose income was eligible to
be considered for exemption under Section 10(20A) ceased to enjoy that benefit after
deletion of that provision w.e.f. 01.04.2003, does not ipso facto preclude their claim for
consideration for benefit as GPU category charities, under Section 11 read with Section
2(15) of the Act.
(ii) Statutory Corporations, Boards, Authorities, Commissions, etc. (by whatsoever
names called) in the housing development, town planning, industrial development sectors
are involved in the advancement of objects of general public utility, therefore are entitled to
be considered as charities in the GPU categories.
62
(iii)Such statutory corporations, boards, trusts authorities, etc. may be involved in
promoting public objects and also in the course of their pursuing their objects, involved or
engaged in activities in the nature of trade, commerce or business.
(iv) The determinative tests to consider when determining whether such statutory bodies,
boards, authorities, corporations, autonomous or selfgoverning government sponsored
bodies, are GPU category charities:
(a) Does the state or central law, or the memorandum of association, constitution, etc.
advance any GPU object, such as development of housing, town planning, development of
industrial areas, or regulation of any activity in the general public interest, supply of essential
goods or services - such as water supply, sewage service, distributing medicines, of food
grains (PDS entities), etc.;
(b) While carrying on of such activities to achieve such objects (which are to be discerned
from the objects and policy of the enactment; or in terms of the controlling instrument, such
as memorandum of association etc.), the purpose for which such public GPU charity, is set-
up - whether for furthering the development or a charitable object or for carrying on trade,
business or commerce or service in relation to such trade, etc.;
(c) Rendition of service or providing any article or goods, by such boards, authority,
corporation, etc., on cost or nominal mark-up basis would ipso facto not be activities in the
nature of business, trade or commerce or service in relation to such business, trade or
commerce;
(d) where the controlling instrument, particularly a statute imposes certain responsibilities
or duties upon the concerned body, such as fixation of rates on pre-determined statutory
basis, or based on formulae regulated by law, or rules having the force of law, setting apart
amenities for the purposes of development, charging fixed rates towards supply of water,
providing sewage services, providing food-grains, medicines, and/or retaining monies in
deposits or government securities and drawing interest therefrom or charging lease rent,
ground rent, etc., per se, recovery of such charges, fee, interest, etc. cannot be
characterized as “fee, cess or other consideration” for engaging in activities in the nature of
trade, commerce, or business, or for providing service in relation in relation thereto;
(e) Does the statute or controlling instrument set out the policy or scheme, for how the
goods and services are to be distributed; in what proportion the surpluses, or profits, can be
permissively garnered; are there are limits within which plots, rates or costs are to be worked
out; whether the function in which the body is engaged in, is normally something a
government or state is expected to engage in, having regard to provisions of the Constitution
and the enacted laws, and the observations of this court in NDMC; whether in case surplus
or gains accrue, the corporation, body or authority is permitted to distribute it, and if so, only
to the government or state; the extent to which the state or its instrumentalities have control
over the corporation or its bodies, and whether it is subject to directions by the concerned
government, etc.;
(f) As long as the concerned statutory body, corporation, authority, etc. while actually
furthering a GPU object, carries out activities that entail some trade, commerce or business,
which generates profit (i.e., amounts that are significantly higher than the cost), and the
quantum of such receipts are within the prescribed limit (20% as mandated by the second
proviso to Section 2(15)) – the concerned statutory or government organisations can be
characterized as GPU charities. It goes without saying that the other conditions imposed by
the seventh proviso to Section 10(23C) and by Section 11 have to necessarily be fulfilled.
63
(v) As a consequence, it is necessary in each case, having regard to the first proviso and
seventeenth proviso (the latter introduced in 2012, w.r.e.f 01.04.2009) to Section 10(23C),
that the authority considering granting exemption, takes into account the objects of the
enactment or instrument concerned, its underlying policy, and the nature of the functions,
and activities, of the entity claiming to be a GPU charity. If in the course of its functioning it
collects fees, or any consideration that merely cover its expenditure (including administrative
and other costs plus a small proportion for provision) - such amounts are not consideration
towards trade, commerce or business, or service in relation thereto. However, amounts
which are significantly higher than recovery of costs, have to be treated as receipts from
trade, commerce or business. It is for those amounts, that the quantitative limit in proviso (ii)
to Section 2(15) applies, and for which separate books of account will have to be maintained
under other provisions of the IT Act.
(ii) Statutory regulatory bodies/authorities
191. During the hearings, rival contentions were made in regard to the facial nature of the
public utility character of regulatory bodies. A sample special case was that of the Institute
of Chartered Accountants of India (ICAI). In respect of some years, the revenue has
preferred appeals and in respect of some others, the Institute has preferred appeals.
Reliance was placed upon the provisions of the ICAI Act and detailed submissions were
made to emphasise that it plays a pivotal role in regulating the entire universe of vocation of
Chartered Accountants – i.e., selecting candidates that can undergo the educational course,
setting the syllabus for the Chartered Accountancy examination; holding classes, training
sessions and imparting education; conducting exams, etc. It was highlighted that the
membership of the institute, i.e., those who are enrolled as Chartered Accounts has grown
significantly. Whereas in the end of financial year 2005, the membership was 1.23 lakhs, it
had increased to 1,86,440 on 31.03.2012. Likewise, there was an exponential growth in the
students appearing in the examination - in 2005, it was 2,96,294, and on 31.03.2012, it had
increased to 10,70,839. Apparently, the Institute conducts distance education courses and
also conducts classroom instruction facilities. These are integrated with the course
curriculum. Additionally, it was urged that no commercial motive was involved; coaching and
revisional classes conducted are very nominally priced - ranging from ₹1500 to ₹2500 for
one group, and from ₹4000 to ₹6000 for both groups, depending on cities where the classes
are held.
192. During the submissions on behalf of the Institute, the financials for different years were
provided. It was revealed that the total outflow towards salaries for 2003-04 was ₹55.27
lakhs and depreciation for the same was ₹51.64 lakhs. The total expenditure for that year
was ₹1.0691 lakhs. As against that, the Revenue earned from generation of fees for the
corresponding year which was ₹1.78 crores and the corresponding expenditure was ₹96.93
lakhs. The corresponding figures for FY 2011-12 for salaries was ₹2.94 crores. The
depreciation was Rs.4.05 crores. The total expenditure thus was ₹ 6.9 crores. As against
this, the amount received towards fees was ₹6.36 crores and expenditure incurred towards
coaching, including salaries, provisions of course material, etc. was ₹4.34 crores. The
surplus (without including administrative expenditure) for that year was ₹2.01 crores. The
Institute apparently cannot distribute the surplus or utilise it for any activity other than what
is set out under the controlling statute and its rules.
193. The Revenue highlighted that conducting courses leading to a professional
qualification and charging fees for it is in the nature of a ‘service’, and all services in relation
to trade, commerce or business squarely falls within the mischief of Section 2(15), which has
to preclude the institute’s claim for exemption as a GPU charity.
64
194. The Institute is a creature of the Institute of Chartered Accountants Act, 1949. By
Section 4 of this Act, every person who qualifies in the examination conducted by the
Institute has to seek registration as a Chartered Accountant. Only when members obtain
certificates issued by the Council of the Institute under Section 6 can they be known as a
‘Chartered Accountant’ and be entitled to practice that profession (Sections 6 and 7). The
Council of the Institute is constituted under Section 9 which defines such constitution and
the manner for holding elections, etc. The functions of the Council by Section 15(2A) include
approving the academic courses and their contents, examining the candidates, regulation
and articleship assistance, prescribing qualification for entry of persons in the register,
collection of fees from members; the regulation and maintenance and status of the
professional qualifications of the members of the Institute, etc. By Section 15A, universities
are enabled to impart education on subjects covered by the academic courses of the
Institute. However, by Section 15A(2) while awarding degrees or diplomas, their designation
should not resemble or be identical to what is awarded by the Institute. The finances are
regulated by Section 18. The Council is enjoined to maintain the register under Section 19
and has disciplinary powers by virtue of Section 21A, 21B and 21C of the Act.
195. These provisions of the Act clarify beyond a doubt that the Institute performs statutory
functions in the larger public interest of regulating the standards of education, leading up to
the profession of Chartered Accountancy and also prescribing standards of professional
etiquette, behaviour, and discipline of its members. No other entity or body has the authority
in law to perform the functions that the Institute does. Although the Act regulating Chartered
Accountancy came into force prior to the Constitution of India, the subject (of regulating
professions, etc.) appears to be relatable to the exercise of legislative power under Entry 25
and 26 of the Concurrent List149. Furthermore, they also appear to conform to Entry 65 of
the Union List150 (which has been adverted to in Entry 25 of the Concurrent List). As things
stand, the Institute is the only body which prescribes the contents of professional education
and entirely regulates the profession of Chartered Accountancy. There is no other body
authorised to perform any other duties which it performs. It, therefore, clearly falls in the
description of a charity advancing general public utility. Having regard to the previous
discussion on the nature of charities and what constitutes activities in the ‘nature of trade,
business or commerce’, the functions of the Institute ipso facto does not fall within the
description of such ‘prohibited activities’. The fees charged by the Institute and the manner
of its utilisation are entirely controlled by law. Furthermore, the material on record shows that
the amounts received by it are not towards providing any commercial service or business
but are essential for the providing of service to the society and the general public.
196. Similarly, there are several other regulatory bodies that discharge functions which are
otherwise within the domain of the State. A singular characteristic of ICAI and other statutory
bodies which can be said to regulate specific functions and professions (including the
profession of Cost and Work Accountants, and Company Secretary, etc.) is the powers
conferred upon them by the statutes to prescribe standards and enforce them through
149
In List III of the Seventh Schedule to the Constitution of India,
“25. Education, including technical education, medical education and universities, subject to the provisions of entries 63, 64, 65
and 66 of List I; vocational and technical training of labour.
26. Legal, medical and other professions”.
150
In List I of the Seventh Schedule to the Constitution of India,
“65. Union agencies and institutions for—
(a) professional, vocational or technical training, including the training of police officers; or
(b) the promotion of special studies or research; or
(c) scientific or technical assistance in the investigation or detection of crime.”
65
disciplinary sanctions. Therefore, it is held that bodies which regulate professions and are
created by or under statutes which are enjoined to prescribe compulsory courses to be
undergone before the individuals concerned is entitled to claim entry into the profession or
vocation, and also continuously monitor the conduct of its members do not ipso facto carry
on activities in the nature of trade, commerce or business, or services in relation thereto.
197. At the same time, this court would sound a note of caution. It is important, at times,
while considering the nature of activities (which may be part of a statutory mandate) that
regulatory bodies may perform, whether the kind of consideration charged is vastly or
significantly higher than the costs it incurs. For instance, there can be in given situations,
regulatory fees which may have to be paid annually, or the body may require candidates, or
professionals to purchase and fill forms, for entry into the profession, or towards
examinations. If the level of such fees or collection towards forms, brochures, or exams are
significantly higher than the cost, such income would attract the mischief of proviso to
Section 2(15), and would have to be within the limits prescribed by sub-clause (ii) of the
proviso to Section 2(15).
198. The next set of ‘statutory regulatory authorities’ among the present batch are those
related to authorities set up under the Seeds Act, 1966 (i.e, the Andhra Pradesh State Seeds
Certification Authority and the Rajasthan State Seeds and Organic Production certification
Agency). These two entities are set up as societies under Section 8 of the Seeds Act, and
comprise of farmers, farmers cooperatives’ representatives, seed certification authorities,
etc. The task of these agencies and authorities is certification of seeds, to decide whether to
certify supply of seeds of “any notified kind or variety”, by applicants who may wish to offer
them for trade. These agencies/authorities scrutinize the samples to ensure they conform to
the requisite standard notified under Section 6. These decisions are subject to appeal under
Section 11.
199. The functioning of the seed certification agency, is a crucial one, in those only seeds
conforming to prescribed standards, are permitted to be traded and used, by farmers. Such
standards are - in the context of the fact that agriculture is one of the mainstays of the
economy, and furthermore, pivotal for food security - essential as they ensure efficacy of
seeds and guarantee to the farmers that they can be relied upon. The essential nature of
the regulatory function performed by these certification agencies is obvious. The nature of
their activities is not by way of trade, commerce or business, nor service in relation to trade
commerce, business, for some form of consideration.
(iii) Trade Promotion bodies, councils, associations or organizations
200. Surat Art Silk (supra) and other decisions, had ruled that as long as the objects of
trade promotion bodies were for general public utility - wherein ‘trade promotion’ in itself,
was held to be a GPU - the fact that incidentally these bodies carried on some commercial
activity, leading to profit, did not preclude them from claiming to be driven by charitable
purpose. As observed earlier, the enunciation of those principles were in the context of the
unamended Section 2(15).
201. The question that arises is whether the change in definition impacts the claims of trade
promotion bodies, federations of commerce, or such organizations, that they are GPU
charities . The judgment in Surat Art Silk (supra) proceeded on the assumption that trade
promotion was the pre-dominant object of the GPU charity before the court, and that other
objects – including procuring licences, trade etc. were incidental. The assessee in Surat Silk
had clear trading objects:
66
“(b) To carry on all and any of the business of Art Silk Yarn, Raw Silk, Cotton Yarn as well as Art
Silk f loth, Silk Cloth and Cotton Cloth belonging to and on behalf of the members.
********* **********
(e) To buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on
behalf of the Members.”
This court, nevertheless, held that since the predominant object of the assessee was trade
promotion, while furthering it, the fact that some trading occurred, leading to income, did not
preclude the assessee from claiming tax exemption. 202. In the opinion of this court, the
change in definition in Section 2(15) and the negative phraseology - excluding from
consideration, trusts or institutions which provide services in relation to trade, commerce or
business, for fee or other consideration - has made a difference. Organizing meetings,
disseminating information through publications, holding awareness camps and events,
would be broadly covered by trade promotion. However, when a trade promotion body
provides individualized or specialized services - such as conducting paid workshops, training
courses, skill development courses certified by it, and hires venues which are then let out to
industrial, trading or business organizations, to promote and advertise their respective
businesses, the claim for GPU status needs to be scrutinised more closely. Such activities
are in the nature of services “in relation to” trade, commerce or business. These activities,
and the facility of consultation, or skill development courses, are meant to improve business
activities, and make them more efficient. The receipts from such activities clearly are ‘fee or
other consideration’ for providing service “in relation to” trade, commerce or business.
203. The revenue has appealed to this court, in respect of two assessment years, in the
case of Apparel Export Promotion Council (AEPC). The objects of AEPC, which was set up
in 1978 – include promotion of ready-made garment export. To achieve that end, its objects
include providing training to instil skills in the workforce, to improve skills in the industry;
guide in sourcing machinery; to serve as a body advising, providing information on market
or technical intelligence; assisting the concerned industry in obtaining import licenses;
showcase the best capabilities of Indian garment exports through the prestigious “India
International Garment Fair” organised twice a year by AEPC, etc. These fairs host over 350
participants who exhibit their garment designs and patterns. Other functions are to provide
information, and to provide market research. AEPC also assists in developing new design
patterns and garments and to perform promotional activities in individual foreign markets.
Further, AEPC sends missions and trade delegations abroad, who participate in international
fairs; and conducts surveys to gather information on potential export of ready-made
garments.
204. As part of its functioning, it also books bulk space, which is then rented out to individual
Indian exporters, who showcase their products and services, and ultimately secure export
orders. Towards these services, i.e., booking and providing space, AEPC charges rentals.
Now, these rents are not towards fixed assets owned by it. They are in fact charges, or fees,
towards services in relation to business; likewise, the skill development and diploma courses
conducted by it, for which fees are charged, are to improve business functioning of garment
exporters. Furthermore, market surveys and market intelligence, especially country specific
activities, aimed at catering to specified exporters, or specified class of exporters, is also
service in relation to trade, commerce or business.
205. In the circumstances, it cannot be said that AEPC’s functioning does not involve any
element of trade, commerce or business, or service in relation thereto. Though in some
instances, the recipient may be an individual business house or exporter, there is no doubt
67
that these activities, performed by a trade body continue to be trade promotion. Therefore,
they are in the “actual course of carrying on” the GPU activity. In such a case, for each year,
the question would be whether the quantum from these receipts, and other such receipts
are within the limit prescribed by the sub-clause (ii) to proviso to Section 2(15). If they are
within the limits, AEPC would be – for that year, entitled to claim benefit as a GPU charity.
(iv) Non-statutory bodies - ERNET, NIXI and GS1 India
206. ERNET is a not-for profit society, set up under the aegis of the Union Government. At
one time, government functionaries, including the late President, APJ Abdul Kalam, were
members, on account of their ex officio capacity. The objects of this assessee are to
“3.1.1 To advance the cause of computer communication in the country in all its aspects and
dimensions with a view to provide rapid nationwide development of the sector and technological and
economic growth of the county.
3.1.2 To develop, design, setup and operate nationwide state of the art computer communication
infrastructure with international connectivity directed towards research and development,
advancement of high quality education, create and host content, express creative and academic
potential via intranet and intranet peer to peer connectivity among educational and research
institutions in the country and the world and make available the communication infrastructure to
users in academic, research and development institutions, Govt organizations in line with national
priorities.”
207. ERNET’s networks are a mix of terrestrial and satellite-based wide-area network. It
provides services through its 15 Points of Presence (PoPs) located across the country. All
those are equipped to provide access to Intranet, Internet and Digital Library through trial
leased circuits and radio links to the user institutions. The PoP at STPI Bengaluru provides
Intranet and Internet access through Satellite. ERNET provides, services, namely, Network
Access Services, Network Applications Services, Hosting Services, Operations Support
Services und Domain Registration Services under srnet.in, ac.in, edu.in & res.in domains.
Funded through government grants, its projects support educational networks and
development of internet infrastructure in numerous other segments of society.
208. Having regard to the nature of ERNET’s activities, it cannot be said that they are in
the nature of trade, commerce or business, or service, towards trade, commerce or
business. It has to receive fees, to reimburse its costs. The materials on record nowhere
suggest that its receipts (in the nature of membership fee, connectivity charges, data transfer
differential charges, and registration charges) are of such nature as to be called as fees or
consideration towards business, trade or commerce, or service in relation to it. The functions
ERNET performs are vital to the development of online educational and research platforms.
For these reasons, it is held that the impugned judgment, which upheld the ITAT’s order,
does not call for interference.
209. The Revenue has appealed the decision of Delhi High Court in which the National
Internet Exchange of India (NIXI) was held to be a GPU category charity. The materials on
record show that NIXI was established in 2003 under the aegis of the Ministry of Information
Technology of the Union Government for the promotion and growth of internet services in
India, to regulate the internet traffic, act as an internet exchange, and undertake “.in” domain
name registration. Concededly, NIXI, is a not for profit, and is barred from undertaking any
commercial or business activity. Its object is to promote the interests of internet service
providers and internet consumers in India, improve quality of internet service, save foreign
exchange, and carry on domain name operations. It is bound by licensing conditions – which
include the prohibition from altering its memorandum, without the prior consent of the Union
68
Government. According to the submissions made on NIXI’s behalf, it charges annual
membership fee of ₹1000/- and registration of second and third level domain names at
₹500/- and ₹250/-. The finding of the ITAT and the High Court are that NIXI’s objects and
functioning are by way of general public utility and thus it is a GPU category charity.
210. Having regard to the findings on record and the materials placed by the parties, it is
evident that NIXI carries on the essential – crucial purpose of promoting internet services
and more importantly, regulating domain name registration which is extremely essential for
internet users in India. A country’s need to have a domestic internet exchange, rather than
depend on an international one, cannot be overemphasized. The Union Government’s object
of setting up of internet exchange is part of its essential function as a government to regulate
certain segment of the communication networks. In the absence of a single entity authorized
to register “.in” domain names, there is bound to be chaos or confusion.
211. In view of the foregoing discussion, this Court is of the opinion that the revenue’s
contention that NIXI does not merely carry-on public purpose of regulatory activity but is
involved in trade, commerce, or business or in providing service in relation thereto, cannot
be accepted.
212. The next assessee under consideration – is GS1 India. GS1 codes were developed
and created by GS1 International, Belgium (an international not-forprofit under Belgium tax
law). This coding system has been in use worldwide and is even mandatory for some
services/goods, or adopted for significant advantages being a singular identification system,
recognized and accepted all over the world. The code promotes universal standard in
Electronic Data Inter-exchanged (EDI) and other services. This system of coding has been
accorded priority by the Government of India as it is a compulsory requirement on products
exported from India. Government of India had set up non-profit organizations EAN India,
now known as GS1 India (the assessee).
213. Counsel on behalf of GS1 India, submitted that GS1 is affiliated and conferred
exclusive rights relating to GS1 coding in India. The GS1 code on a product, provides a
unique identification to it with wide ranging benefits and advantages which facilitate tracking,
tracing of the product, product recalls, counterfeit detection, user safety due to accuracy,
wastage control through accurate monitoring and stock levels for commodities, security and
safety of supply chains, detection of illegal trade, etc. The unique identification or coding
system developed and operated by GS1 International or GS1 India is recognized and
accepted globally. Additionally, the unique identification code can be enabled with RFID chip
and other electronic technology. Being one of its kinds globally, only a GS1 registered
organization can set up and promote the said system/standard within a country. These can
be used for several fields including public distribution system, agriculture, health products,
etc. and has been successfully used for product package labels. The utility and benefits of
a universal coding system assessable by anyone across the globe, for the consumers,
government, manufacturers, traders, exporters, etc. are enormous and significant. Initial
registration fee of ₹ 20,000/- is charged by GS1, plus annual fee of ₹4,000/- (enhanced to ₹
5,000/- from financial year 2006-07 onwards) from third parties, who become subscribing
members, and are entitled to use the GS1 coding system.
214. It was submitted on behalf of GS1 that it was set up as society in 1996 and sponsored
by the Union Government. The Union Government representatives and the representatives
of the trade bodies are its members. The activities of GS1 are extremely important and have
to be characterized as involving general public utility. It was submitted that having regard to
the fact that GS1 provides services to all organizations regardless of whether they carry on
69
business, trade or other commercial activity, a narrow interpretation confining the expression
“service in relation to” should not be adopted. It was urged, that there is no dispute about
the fact that GS1 was directed to be granted registration under the IT Act, and that GS1
Belgium, the parent organization, so to say, which owns the technology, has been granted
the status of not for profit charity. GS1 urges that it is not dealing or treating the prized rights
as a right be exploited commercially to earn or generate profits. It is not directly or indirectly
subjecting their activity to market mechanism/dynamics (i.e., demand and supply), rather it
is motivated and prompted to serve the beneficiaries. Therefore, this is not a case of
commercial exploitation of intellectual property rights to earn profits (as contended by the
Revenue), but rather a case where a token fee has been fixed and payable by the user of
the global identification system. Clause 44 of GSI’s Memorandum of Association of the
petitioner stipulates that it is a "Not-for-Profit" society and the funds/receipts are to only be
used for promotion of objects of the society for which it is established, including sustenance
and expansion.
215. The revenue contended that although GS1 India has a monopoly, the mere fact that
it is stated to be a Not for Profit Society with some governmental involvement in its
management would not detract from its essential nature; which is to sub-serve the interest
of the business community. It was elaborated in this context that GS1 by providing bar codes
and the coding system secured by license, not only exploits the intellectual property rights
but is in fact engaged in services in relation to trade, commerce or business. Counsel pointed
to the fact that the revenues of GS1 has steadily increased over the years. It was pointed
out that according to the balance sheet the aggregate registration fees receipt for the year
ending 31.03.2007 was ₹1,80,80,760/- whereas for the year ending 31.03.2008 which had
increased to ₹4,85,47,170/-. Likewise, membership fees had increased from ₹44,40,000/-
as on 31.03.2007 to ₹93,42,500/-. Furthermore, renewal fees for the year ending 2007 was
₹1,68,57,200/- whereas for the next year i.e., as on 31.03.2008 it was ₹1,90,50,650/-. The
Revenue submitted that even where income and interest were to be excluded, the increase
on a yearly basis was exponential. Likewise, it was pointed out that registration fees as on
31.03.2011 was ₹4,24,69,850/- whereas as on 31.03.2012 it was ₹6,07,58,100/-;
subscription fee as on 31.03.2011 was ₹1,02,06,720/-; for the next year i.e., on 31.03.2012
it was ₹1,01,69,850/-. Likewise, the subscription renewal fees as on 31.03.2011 was
₹4,18,62,804/- and the same head as on 31.03.2012 was ₹4,46,71,134/-.
216. The Revenue emphasises the fact that GS1 is a monopolist organization, has
exclusive licenses in relation to bar coding technology which it admittedly uses for fee or
other consideration. It is highlighted that these services are provided mostly to business,
trade purpose, manufacturing, etc. On the other hand, GS1 urges that it performs the
important public function which enables not merely manufactures but others involved in
supplies of various articles by packaging, etc., to regulate and ensure their identity.
217. In the opinion of this Court, GS1’s functions no doubt is of general public utility.
However, equally the services it performs are to aid businesses manufactures, tradesmen
and commercial establishments. Bar coding packaged articles and goods assists their
consigners to identify them; helps manufactures, and marketing organizations (especially in
the context of contemporary times, online platforms which serve as market places). The
objective of GS1 is therefore, to provide service in relation to business, trade or commerce
- for a fee or other consideration. It is also true, that the coding system it possesses and the
facilities it provides, is capable of and perhaps is being used, by other sectors, in the welfare
or public interest fields. However, in the absence of any figures, showing the contribution of
GS1’s revenues from those segments, and whether it charges lower amounts, from such
70
organizations, no inference can be drawn in that regard. The materials on record show that
the coding services are used for commercial or business purposes. Having regard to these
circumstances, the Court is of the opinion that the impugned judgment and order calls for
interference.
(v) State Cricket Associations
218. The revenue has preferred appeals against the decision of the Gujarat High Court in
respect of orders made in the cases of the Gujarat Cricket Association, the Saurashtra
Cricket Association, Baroda and Rajkot Cricket Associations and the decision of the
Rajasthan High Court, in respect of the Rajasthan Cricket Association. The main facts,
relevant for deciding the questions involved are set out in the order of the ITAT151 against
which the Gujarat High Court rendered the impugned judgment152. Since the legal issues
are common in relation to all these matters, the facts relating to the Gujarat Cricket
Association (GCA) may be considered for convenience.
219. The objects of GCA (and other associations) are to control, supervise, regulate,
promote or encourage, and develop the game of cricket in the area under its jurisdiction.
The association can also undertake any other and all activities which may be beneficial to it.
GCA’s objects include activities aimed at creating, fostering and maintaining friendly and
cordial relationship through sports tournaments and competitions, to create a healthy spirit
through the medium of sports in general, and cricket in particular. The other objects include:
to instil the spirit of sportsmanship in school and college students, members of other
institutions, and other citizens; instil the ideals of cricket and educate them in the same; to
select teams to represent the association in any competitive forum; to arrange, supervise,
hold, encourage and finance visits of teams; to arrange or manage league and/or any other
tournaments; to promote persons, meetings, competitions and matches in relation to sports;
and to offer, give/distribute or contribute towards prizes, medals and awards; to lay out
grounds for playing the game; and to provide pavilion, stadia, other conveniences and
amenities in connection therewith. The GCA also includes within its objects, providing
coaching to deserving persons in the various departments of the game of cricket; engaging
professional cricketers, coaches, umpires, groundsmen, and other employees, and to pay
remuneration or honorarium to them; and to start, sponsor and/or to subscribe to any fund
for the benefit of such persons or their families. The GCA can collect funds for the purpose
of the Association and utilise it in such manner as its Managing Committee considers
desirable for the fulfilment of its objects.
220. The assessing authorities denied GCA’s claim and that of the other associations, that
they were charities. Before the ITAT, it was contended, on behalf of the revenue, inter alia,
that looking at the nature of the relationship of these state cricket associations with the Board
of Cricket Control of India (BCCI), the amounts received by these associations from BCCI
were in the nature of consideration or fees, for granting media rights, and collecting their
share, among other things. This amounted to a business or commercial activity. It would, in
this context, be useful to quote the observations set out in the ITAT’s order (which were part
of the commissioner’s order). The Commissioner had taken note of assessment proceedings
in relation to BCCI, and set out its submissions:
“9.7.2 The AO of BCCI, based on the communication of DIT(E), Mumbai, has not granted benefit of
section 11 & 12 of the Act to BCCI. The stand taken by BCCI during its assessment proceedings is
151
ITA Nos: 1257/Ahd/13, 3303/Ahd/16, 3304/Ahd/16, 408/Ahd/17 Assessment years: 2009-10, 2010-11, 2011-12 and 2012-13.
152
SLP (D) No. 16597/2020 against a common judgment dated 27.9.2019, which relate to the Gujarat Cricket Association,
Saurashtra, Baroda and Rajkot Cricket Association Cricket Association.
71
mentioned below. The BCCI vide its submission dated 03/12/2012 to the AO has explained its
relationship with State Cricket Association as follows:-
"1. BCCI is society registered under the Tamil Nadu Societies Registration Act. It was formed in the
year 1929 with the object of promotion and development of cricket in India and is a member of the
International Cricket Council (ICC) the regulatory body for world cricket. As a member of ICC, BCCI
represents India in bilateral tours between member countries and in ICC tournaments such as the
World Cup.
2. BCCI has 30 members out of whom 25 are state cricket associations, 2 are private clubs and 3
are Central Government Institutions. BCCI does not own or manage the infrastructure and facilities
that are required for cricket. It encourages and oversees the various state associations to promote
the game, build the required infrastructure organize tournaments, leagues, coaching camps etc. in
their respective states. Whenever a foreign team visits India, the international matches such as Test
and ODI are allotted by BCCI to the State Cricket Associations by a rotation policy. The matches
are conducted and managed by the respective state associations and over time, arrangements have
evolved about the respective responsibilities, rights, shares of revenue etc. These have evolved in
order to promote co-operation and unity among the member associations and by applying the
principles of equity and fairness, for which the sport of cricket is renowned."
9.7.3 The BCCI in its submission dated 21/1/2013 earned subsidy paid to SCAs and TV Subvention
as stated as follows:-
"13.2
PAYMENTS TO STATE ASSOCIATIONS
During the year, BCCI has paid amounts to the state associations under the head "TV, Subventions
to Associations". This represents payment of 70% of the revenue from sale of media rights to the
state associations".
Whenever a foreign team visits India, the international matches such as Test and ODI are allotted
by BCCI to the state cricket associations by a rotation policy. The matches are conducted and
managed by the respective state associations. It is not possible for BCCI to conduct all these
matches with its own limited personnel. It is dependent on the state associations, their office bearers,
their employees and their network and resources at the local centre to conduct the matches.
The association manage the entire match right from provision of security to players, spectators in
coordination with respective state police personnel, taking other security measures like fire
prevention etc. The association incurs a good chunk of expenditure in conducting an International
Test/ODI/T20/IPL/CL T20 Matches.
In order to have fair and equitable sharing of the revenues, arrangements have evolved over time,
about the respective responsibilities, rights, shares of revenue etc. of BCCI and the state
associations. The state association is entitled to the ticket revenue and ground sponsorship
revenues. Expenses on account of security for players and spectators, temporary stands, operation
of floodlights, Score Boards, management of crowd. Insurance for the match, electricity charges,
catering etc are met by the state associations. On the other had expenditure on transportation of
players and other match officials, boarding and lodging, expenses on food for players and officials,
tour fee, match fee, etc are met by BCCI and revenues from sponsorship belong to BCCI. In respect
of revenues from sale of media rights, an arrangement has evolved over time. Until 1991-92 the
income from media rights was meager. With the growth in income from media rights, it became
necessary to optimize the arrangement for sale of media rights. For a Test series or ODI series
conducted in multiple centers and organised by BCCI and multiple state associations, it was found
that if each state association were to negotiate the sale of rights to events in its centre, its negotiating
strength would be low. It was, therefore, agreed that BCCI would negotiate the sale of media rights
for the entire country to optimize the income under this head. It was further decided that out of the
receipts from the sale of media rights 70% of the gross revenue less production cost would belong
to the state associations. Every year, BCCI has paid out exactly 70% of its receipts from media
72
rights (less- production cost) to the state associations. This amount has been utilized by the
respective associations to build infrastructure and promote cricket, making the game more popular,
nurturing and encouraging cricket talent, and leading to higher revenues from media rights.
************* ****************
Even in the event that exemption under section 11 is denied, the payments to state associations
must be allowed as a deduction, as expenditure laid out or expended wholly and exclusively for the
purpose of earning such income, it must be appreciated that in order to earn revenues, BCCI was
and continues to be highly dependent on the state associations. BCCI does not have the
infrastructure and the resources to conduct the matches by itself and is dependent on the state
associations to conduct the matches. The income from media rights is dependent on the efforts of
the state associations in conducting the matches from which the media rights accrue. The division
of revenues and expenditure is a matter of arrangement between the parties. Certain incomes such
as sale of ticket revenues belong to the state associations, who meet the expenditure on the
matches such as security for players and spectators temporary stands, operation of floodlights,
Score Boards, management of crowd, insurance for the match, electricity charges, catering etc.
Whereas with regard to the income from sale of media rights, the arrangement between BCCI and
the State Associations has been that 70% of the revenue would belong to the State Associations.
As shown, this has been the arrangement between the parties for the twenty years. The State
Associations are entitled by virtue of established practice to 70% of the media right fee. It is in
expectation of this revenue that the various state associations take an active part and cooperate in
the conduct of the matches. This payment is therefore made only with a view to earn the income
from media rights.”
221. The ITAT accepted the assessee’s contentions, and held that the associations were
GPU charities:
“35. Let us take a pause here and examine as to what are the activities of the assessee cricket
associations so as to be brought within the ambit of trade, commerce or business. We have seen
objects of the association, which are reproduced earlier in our order, and it is not even the case of
the revenue that these objects have anything to do with any trade, commerce or business; these
objects are simply to promote cricket. The trigger for invoking proviso to Section 2(15), as Shri
Soparkar rightly contends, has to an activity of the assessee which is in the nature of trade,
commerce or business. However, the case of the revenue authorities hinges on the allegation that
the way and manner in which cricket matches are being organized, particularly the IPL matches, the
activity of organizing cricket matches is nothing but brute commerce. Undoubtedly, it would appear
that right from the time Kerry Packer started his World Series Cricket in 1977, there has been no
looking back in commercialization of cricket and the impact of this commercialization has not left
Indian cricket intact. The Indian Premier League and the rules of the game being governed by the
dictates of commercial considerations may seem to be one such example of commercialization of
Indian cricket. The difficulty for the case of the revenue before us, however, is that these matches
are not being organized by the local cricket associations. We are told that the matches are being
organized by the Board of Cricket Control of India, but then, if we are to accept this claim and invoke
the proviso to Section 2(15) for this reason, it will amount to a situation in which proviso to Section
2(15) is being invoked on account of activities of an entity other than the assessees- something
which law does not permit. We are not really concerned, at this stage, whether the allegations about
commercialization of cricket by the BCCI are correct or not, because that aspect of the matter would
be relevant only for the purpose of proviso to Section 2(15) being invoked in the hands of the BCCI.
We do not wish to deal with that aspect of the matter or to make any observations which would
prejudge the case of the BCCI. Suffice to say that the very foundation of revenue's case is devoid
of legally sustainable basis for the short reason that the commercialization of cricket by the BCCI,
even if that be so, cannot be reason enough to invoke the proviso to Section 2(15). We are alive o
learned Commissioner (DR)'s suggestion that the cricket associations cannot be seen on standalone
basis as the BCCI is nothing but an apex body of these cricket associations at a collective level and
whatever BCCI does is at the behest of or with the connivance of the local cricket associations, and
73
that it is not the case that anyone can become a Member of the BCCI because only a recognized
cricket association can become a Member of the BCCI. We are also alive to learned Commissioner's
argument that what is being sought to be protected by the charitable status of these associations is
the share of these cricket associations from the commercial profits earned by the BCCI by organizing
the cricket matches. The problem, however, is that the activities of the apex body, as we have
explained earlier, cannot be reason enough to trigger proviso to Section 2(15) in these cases.
Whether these cricket associations collectively constitute BCCI or not, in the event of BCCI being
involved in commercial activities, the taxability of such commercial profits will arise in the hands of
the BCCI and not the end beneficiaries. Even in such a case the point of taxability of these profits is
the BCCI and not the cricket associations, because, even going by learned Commissioner's
arguments, these receipts in the hands of the cricket associations is nothing but appropriation of
profits. What can be taxed is accrual of profits and not appropriation of profits. In any event,
distinction between the cricket associations and the BCCI cannot be ignored for the purposes of tax
treatment. There is no dispute that the matches were organized by the BCCI, and the assessee
cannot thus be faulted for the commercial considerations said to be inherent in planning the
matches. As we make these observations, and as we do not have the benefit of hearing the
perspective of the BCCI, we make it clear that these observations will have no bearing on any
adjudication in the hands of the BCCI. Suffice to say that so far as the cricket associations are
concerned, the allegations of the revenue authorities have no bearing on the denial of the status of
'charitable activities' in the hands of the cricket associations before us- particularly as learned
Commissioner has not been able to point out a single object of the assessee cricket associations
which is in the nature of trade, commerce or business, and, as it is not even in dispute that the
objects being pursued by the assessee cricket associations are "objects of general public utility"
under section 2(15). All the objects of the assessee cricket associations, as reproduced earlier in
this order, unambiguously seek to promote the cricket, and this object, as has been all along
accepted by the CBDT itself, an object of general public utility.”
222. In granting relief, the ITAT was persuaded by the decision of the Madras High Court,
in Tamil Nadu Cricket Association v. Director of Income Tax (Exemptions) & Ors.153, and
held
“54. The assessee is a member of the Board of Control for Cricket in India (BCCI), which in turn is
a member of ICC (International Cricket Council). BCCI allots test matches with visiting foreign team
and one day international matches to various member cricket associations which organise the
matches in their stadia. The franchisees conduct matches in the stadia belonging to the State cricket
association. The State association is entitled to all in-stadia sponsorship advertisement and
beverage revenue and it incurs expenses for the conduct of the matches. BCCI earns revenue by
way of sponsorship and media rights as well as franchisee revenue for IPL and it distributes 70 per
cent, of the revenue to the member cricket association. Thus, the assessee is also the recipient of
the revenue. Thus, for invoking section 12AA read with section 2(15) of the Act, the Revenue has
to show that the activities are not fitting with the objects of the association and that the dominant
activities are in the nature of trade, commerce and business. We do not think that by the volume of
receipt one can draw the inference that the activity is commercial. The Income-tax Appellate
Tribunal's view that it is an entertainment and, hence, offended section 2(15) of the Act does not
appear to be correct and the same is based on its own impression on free ticket, payment of
entertainment tax and presence of cheer group and given the irrelevant consideration. These
considerations are not germane in considering the question as to whether the activities are genuine
or carried on in accordance with the objects of the association. We can only say that the Income-
tax Appellate Tribunal rested its decision on consideration which are not relevant for considering the
test specified under section 12AA(3) to impose commercial character to the activity of the
association. In the circumstances, we agree with the assessee that the Revenue has not made out
any ground to cancel the registration under section 12AA(3) of the Act.
153
[2014] 360 ITR 633 (Mad)
74
55. As regards the observation of the Income-tax Appellate Tribunal that IPL matches and Celebrity
cricket matches are also being held by the association and hence, it is an entertainment industry,
we need not go into these aspects for the order of the Director of Income-tax (Exemptions) casts no
doubt on the genuineness of the objects of the trust. Hence, it is for the Assessing Officer to take
note of all facts, while considering the same under section 11 of the Income-tax Act, 1961. We
disapprove the approach of the Tribunal in this regard. In the above said circumstances, we set
aside the order of the Income-tax Appellate Tribunal.”
223. The ITAT agreed with the assessees that TV subsidy amounts received by the
associations were “corpus donations” in furtherance of the BCCI’s resolution dated
05.09.2001. It accordingly held that these amounts were in the capital field, irrespective of
whether they were fully utilized by the state association, or whether some part of it, was
given to district associations. Thus, for AY 2009-2010, the sum of ₹3,52,86,521 paid by BCCI
to GCA was subsidy, falling in the capital field.
224. It was urged on behalf of the Revenue that the cricket associations are not carrying
on any charitable activity; reliance was placed on the facts to say that substantial amounts
were received by the state associations, towards their share of sale of media rights (as
constituents or members of BCCI), which are commercial receipts. Although the sale of
those rights was by the BCCI, the lion’s share of those amounts was that of the respective
state associations. Furthermore, the state associations owned the stadia, and actually
conducted the matches, in respect of which stadium advertisements and sponsorship
amounts were received: these, too, were in the nature of business or commercial activities.
The assessees on the other hand, submitted that they are distinct from the BCCI. It was
sought to be urged that the activity of sports and sport promotion is basically education, and
hence, per se exempt. Realizing the value of inculcating sportsmanship and fostering the
culture of sport, Parliament had introduced Section 10(23), to exempt income received by
sports bodies. However, that was deleted w.e.f. 01.04.2003. It was argued that this does not
preclude sports bodies, like cricket associations from claiming to be charities. It was urged
that even if the court were not to consider the cricket associations to be education-related
charities, they cannot be denied the status of GPU charities, having regard to the sports
promotional nature of their objects. It was submitted that these bodies are primarily
responsible for fostering the sport, talent spotting, nurturing it, and providing opportunities to
those who have the aptitude and passion for the game of cricket. All these are objects of
general public utility. It was submitted that the amounts which BCCI collects may or may not
be in the course of commerce; however, what is given to the associations is subsidy, which
cannot be termed as consideration for carrying on any commercial activity.
225. At the outset, the contention that sports promotion is ‘education’ and hence, per se
exempt, has to be dealt with. In Lok Shikshana Trust (supra) this court has comprehensively
addressed the scope of the term, and conclude that it would entail “scholastic” education:
“5. The sense in which the word “education” has been used in Section 2(15) is the systematic
instruction, schooling or training given to the young in preparation for the work of life. It also connotes
the whole course of scholastic instruction which a person has received. The word “education” has
not been used in that wide and extended sense, according to which every acquisition of further
knowledge constitutes education. According to this wide and extended sense, travelling is
education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read
newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add
to your knowledge. Again, when you grow up and have dealings with other people, some of whom
are not straight, you learn by experience and thus add to your knowledge of the ways of the world.
If you are not careful, your wallet is liable to be stolen or you are liable to be cheated by some
unscrupulous person. The thief who removes your wallet and the swindler who cheats you teach
75
you a lesson and in the process make you wiser though poorer. If you visit a night club, you get
acquainted with and add to your knowledge about some of the not much revealed realities and
mysteries of life. All this in a way is education in the great school of life. But that is not the sense in
which the word “education” is used in clause (15) of Section 2. What education connotes in that
clause is the process of training and developing the knowledge, skill, mind and character of students
by formal schooling.”
Therefore, there is no doubt that the claim of the present sport associations will not fall within
‘education’ and will have to be examined under the fourth limb of Section 2(15) – i.e., GPU
category, if it is to make a case for tax exemption.
226. BCCI is the body which regulates cricket and represents the country. Within the
country it organizes and conducts the Ranji Trophy, the Irani Trophy, the Duleep Singh
Trophy, the Deodar Trophy and the NKP Salve Challenge Trophy. These are domestic
events, yet only those who are members of the Board and/or recognized by it can take part
in these events. The members of the Board (entitled to vote in its election) are the state
cricket associations.154 The BCCI is the country-level cricket regulator both off and on the
fields, and its functions include selection of players and umpires. The International Cricket
Council (of which BCCI, as the representative body of the country, is a member) possesses
and exercises all the powers to regulate international competitive cricket. It also exercises
disciplinary power – in case of violation of the rules, a country member or the player may be
derecognized. The ICC exercises a monopoly over the sports at the international level
whereas BCCI does so at the country level. BCCI recognizes bodies which are entitled to
participate in the nominated tournaments. Players and umpires also are to be registered with
it.
227. The game of competitive cricket, at the organizational level is structured in such a
manner that BCCI has umbilical ties with the state associations. Not only are the latter, the
members who constitute BCCI and elect its governing bodies, they also own vital
infrastructure necessary to play cricket: such as stadia, and all related facilities. BCCI does
not own those facilities or infrastructure and depends on them. Furthermore, the state
associations are the channels through which players are mostly selected, and get
opportunities to participate in state, national and international level cricket.
228. As things stand, therefore, the state associations and BCCI are linked closely. The
management of the game of cricket is structured in such a way that this link is apparent at
every match or fixture of significance. In the course of conducting matches (which are
scheduled by the BCCI as the national coordinating body), apart from amounts received
towards sale of entry tickets, the state associations also receive advertisement money,
sponsorship fee, etc. from the BCCI. Aside from these, media rights - i.e., broadcasting rights
to each national or international event conducted at various locales owned by the state
associations, and digital rights (all of which are exclusive, in nature) - are auctioned by BCCI.
As noticed above, the BCCI, by its own admission, negotiates the terms on which media
rights are sold, on behalf of the state associations:
“For a Test series or ODI series conducted in multiple centers and organised by BCCI and multiple
state associations, it was found that if each state association were to negotiate the sale of rights to
events in its centre, its negotiating strength would be low. It was, therefore, agreed that BCCI would
negotiate the sale of media rights for the entire country to optimize the income under this head. It
was further decided that out of the receipts from the sale of media rights 70% of the gross revenue
less production cost would belong to the state associations. Every year, BCCI has paid out exactly
154
Rule 3 (a) (ii) (B) of the latest BCCI Memorandum of Association and the Rules and Regulations
76
70% of its receipts from media rights (less- production cost) to the state associations. This amount
has been utilized by the respective associations to build infrastructure and promote cricket, making
the game more popular, nurturing and encouraging cricket talent, and leading to higher revenues
from media rights.”
229. These media, or broadcasting rights, are in the nature of intellectual property rights:
under Section 37 to 40 of the Copyrights Act, 1957. These rights- especially television and
digital rights enable the licensee or the successful bidder to exploit the telecast or broadcast
commercially, by carrying advertisements of various products and services, in the media.
Given that (i) BCCI does not own the stadia, and uses the entire physical infrastructure of
the state associations (ii) expressly negotiates on their behalf for the sale of such rights
(which appear to be purely commercial contracts), the associations’ assertions that they only
received subsidy from BCCI, needed closer examination.
230. The income and expenditure account for the year ending on 31.03.2009 shows that
the total income of the GCA was ₹4,03,98,736.81. Of these sponsorship money was
₹20,00,000/-; bank interest was ₹2,21,88,527.05 and as against the head ‘India v. South
Africa test match’, the sum of ₹1,51,97,741/- has been shown. Of the total of ₹2,21,02,441.45
shown as income, ₹32,24,591.25 is shown as expenditure, only a fraction appears to have
been expended towards promotion of cricket. This is apparent from the following:
S. No. Details of expenditure Amounts
1. Ground equipment of District Cricket Association ₹ 29,34,394/-
2. Prize money to all teams ₹ 27,86,796/-
3. Ground expenditure ₹ 20,06,228/-
4. Cricket academy expenses ₹ 9,51,067/-
5. Coach Fee ₹ 10,06,040/-
6. Senior and Junior tournament subsidy to District Cricket ₹ 7,00,000/-
Association
Total ₹ 1,03,84,525/-
231. The details of the subsidy amounts received from BCCI for every match has been
shown. This aggregates to over ₹41 lakhs. Furthermore, the details received towards the
India-South Africa test fixture paid between 03.04.2008-04.04.2008 has been shown. GCA
received ₹1,57,00,000/- towards sale of space; ticket sales yielded ₹27,57,700 and towards
the head screen income, a sum of ₹3 lakhs was received. After deducting the expenditure,
the excess income received for the year was ₹1,51,97,741/-.
232. In the case of Saurashtra Cricket Association, for the year ended on 31.03.2012,
various heads of income have been disclosed. These include entry fees which is ₹5200
onwards. Interest of income received from Fixed Deposits was to the tune of ₹8,85,67,418/-
; total amount of subsidy received from BCCI is ₹17,56,72,490/-. Of these, the overwhelming
share is towards the IPL money collected by the BCCI – wherein Saurashtra Cricket
Association’s share worked out to a total of ₹17,16,32,490/-.
233. Apart from this, the BCCI also reimbursed to Saurashtra Cricket Association the sum
of ₹73,73,911/-. The income and expenditure account shows a head titled “subvention
income from BCCI” to the extent of ₹8,14,53,834/-. After deducting the heads of expenditure,
excess of income over expenditure for the AY was ₹69,96,537/-. The Cricket Association
77
showed in the expenditure column that the sum of ₹24,00,00,000/- was transferred to the
Cricket infrastructure fund. For the previous year, a sum of ₹21,21,00,000/- was transferred
to the stadium fund.
234. It is quite evident that the activities of the cricket associations are run on business
lines. The associations own physical and other infrastructure, maintain them, have
arrangements for permanent manpower and have well-organised supply chains to cater to
the several matches they host. Many such matches are not at national level and are under-
16 or under-18 matches at the regional level. However, these activities are not to be seen in
isolation but are to be regarded as part of the overall scheme, and ecosystem in which the
game of cricket is organized in India. Talent is spotted, at local levels and dependent on the
promise shown, given appropriate exposure.
235. On a close scrutiny of the expenses borne, having regard to the nature of receipts,
the expenditure incurred by Cricket Associations does not disclose that any significant
proportion is expended towards sustained or organized coaching camps or academies.
Therefore, in the opinion of this court, the ITAT fell into error in not considering the nature of
receipts flowing from the BCCI into the corpus of GCA and SCA – as well as other
associations that are before this court- to determine their true character. The ITAT appears
to have been swayed by the submission that the amount given by the BCCI were towards
capital subsidy.
236. To determine whether a given receipt is to be characterized as falling in the revenue
or capital stream, the objective for which it is given as well as the manner in which it is utilized
has to be scrutinized. This aspect has been highlighted in Sahney Steel & Press Works Ltd
v. Commissioner of Income Tax155 in the following terms:
“It is not the source from which the amount is paid to the assessee which is determinative of the
question whether the subsidy payments are of revenue or capital nature. The first proposition stated
by Viscount Simon in Ostime case [28 TC 261 : (1946) 1 All ER 668] is that if payments in the nature
of subsidy from public funds are made to the assessee to assist him in carrying on his trade or
business, they are trade receipts.”
This has later been followed in Commissioner of Income Tax v. Ponni Sugars156.
237. Recent trends have shown that media rights, especially broadcasting and digital
media rights have yielded colossal revenues to the BCCI. The model adopted in the last 10
years or so has been to auction media rights in respect of events over a 3 or 5-year period.
As discussed previously, these media rights are not per se owned by BCCI, which is but an
association of persons or agglomerate of all the State Cricket Association. The stadia which
form the venue for these cricket matches (in relation to which media rights are transferred
or licensed) are owned by the State Cricket Associations. According to the BCCI itself, the
State Associations can well bargain and enter into arrangements for the sale of such media
rights. However, to obtain better terms, and gain bargaining leverage a centralized form of
sale of such rights has been agreed and adopted by which the BCCI auctions these rights
on behalf of the State Associations. All State Associations put together are entitled to 70%
of the revenue – i.e., the proceeds of sale of the media rights. This may or may not be in
proportion to the events hosted by each or some of the cricket associations. Yet, this forms
part of the arrangement by which the consideration flowing from such commercial rights has
155
1997 (Supp 4) SCR 189
156
2008 (9) SCC 337
78
been agreed to be shared amongst all members of the BCCI. These rights are apparently
commercial.
238. In the light of these, the Court is of the opinion that the ITAT – as well as the High
Court fell into error in accepting at face value the submission that the amounts made over
by BCCI to the cricket associations were in the nature of infrastructure subsidy. In each case,
and for every year, the tax authorities are under an obligation to carefully examine and see
the pattern of receipts and expenditure. Whilst doing so, the nature of rights conveyed by
the BCCI to the successful bidders, in other words, the content of broadcast rights as well
as the arrangement with respect to state associations (either in the form of master
documents, resolutions or individual agreements with state associations) have to be
examined. It goes without saying that there need not be an exact correlation or a
proportionate division between the receipt and the actual expenditure. This is in line with the
principle that what is an adequate consideration for something which is agreed upon by
parties is a matter best left to them. These observations are not however, to be treated as
final; the parties’ contentions in this regard are to be considered on their merit.
(vi) Private trusts
(a) Tribune Trust
239. The Tribune Trust was constituted pursuant to a will executed by late Sardar Dial
Singh Majithia. In clause (xxi) of his Will – after nominating three trustees, the testator
directed that they ought to maintain a press and a newspaper; in clause (xx) the testator
directed that his property in the Tribune Press and newspaper would vest permanently in a
Committee of Trustees who would thereafter maintain them and “keep up the liberal policy
of the newspaper and activity and the excess income after current expenses in improving
the said newspaper and place it on a footing of permanency”.
240. Under the old Act, a question arose as to whether the activity of running a newspaper
was one of general public utility; the revenue disallowed the exemption for AY 1932-33. This
was affirmed by the Lahore High Court. The Privy Council by its decision in In Re: Trustees
of Tribune (supra) allowed the trust’s appeal and held that the trust was neither constituted
for private profit either to the testator nor to any other private person, and that the object of
the paper could be described as one “supplying the province with an organ of educated
public opinion”. The Privy Council, therefore, reasoned that the Trust was established as a
GPU charity.
241. Apparently, the trust was continuously treated as a GPU category charity and
exempted under Section 10(23C)(iv) from 1984-85 onwards. For AY 200910, after
considering the revised return of the trust, the Revenue was of the opinion that it was not
entitled to claim exemption under Section 10(23C). The Punjab and Haryana High Court
which dealt with the Trust’s present appeal was of the opinion that in Surat Art Silk (supra),
this court had considered the judgment of the Privy Council. In that judgment, this Court had
made some observations that even though the activity of the publication of newspaper was
carried on commercial lines with the object of earning profit, it was an activity engaged by
the Trust for the purposes of carrying out its charitable objects. The High Court upheld the
revenue’s contention and based upon its analysis of Section 2(15) concluded that the Trust’s
income derived from its activities were based on profit motive. In doing so, it was noticed
that 85% of the trust’s revenue was from advertisements and interest. The total revenue was
₹161 crores out of which ₹124.87 crores was received from advertisements and ₹11.38 crores
from interest on FDRs; ₹17.49 crores was from sale of newspapers and ₹3.74 crores from
subscriptions of the dailies.
79
242. It was argued on behalf of the trust that it was never intended and in fact, not run on
profitable basis. No part of its income was ever disbursed to any private individual through
profit sharing or otherwise, nor distributed for any purpose other than the activities of the
Trust. It was submitted that the High Court’s surmise that the accumulation of large profits
and its assumption that the Trust could utilize them for non-charitable purposes in future,
was unfounded. In this regard, it was submitted that till 2008-09 all assessments were
completed, since the Revenue was satisfied that more than 85% had been ploughed back
to feed the main charitable activity.
243. It is noticed from the impugned judgment that the High Court concedes to the fact that
the trust’s activities were held by the Privy Council to constitute financing of objects of
‘general public utility’; further that merely because thousands of newspapers were being
published made no difference. It still continues to be a GPU charity.
244. The question then is whether the nature of receipts and income garnered by the Trust,
in the course of actually carrying out its activity of publishing newspaper, can be
characterized as “in the nature of trade, commerce or business” or “service in relation to
trade, commerce or business”, for any consideration. During the course of submissions, it
was urged that advertisement revenue should not be treated as business or commercial
receipts since that virtually is the lifeblood which sustains the activity of publication of
newspapers. It was highlighted that the object of maintaining the activity of publishing and
distribution of newspaper remains the advancement of general public utility, as it has the
effect of both notifying and educating the general public about the current affairs and
developments. The inclusion of advertisements also serves as information to the general
public, especially in areas of employment, availability of resources, etc. Therefore,
publication of advertisement is intrinsically connected with the activity of printing and
publishing of newspapers.
245. The publication of advertisements for consideration, in the opinion of the court, by the
newspaper, cannot but be termed as an activity in the nature of carrying on business, trade
or commerce for a fee or consideration. That the newspaper published by the trust (“the
Tribune”) in this case is funded mainly through advertisement is no basis for holding that
publishing such advertisements by the Trust does not constitute business. The object of the
trust to involve or engage in publication of newspapers. Publishing advertisements is
obviously to garner receipts which are in the nature of profit. Now, by virtue of the amended
definition of Section 2(15), GPU charities can engage themselves in business or commercial
activity or profit, only if the receipts from such activities do not exceed the quantitative limit
of the overall receipts earned in a given year. While the assessee’s contention that
publication of advertisement is intrinsically linked with newspaper activity (thereby fulfilling
sub-clause (i) of the proviso to Section 2(15), i.e. an activity in the course of actual carrying
on of the activity towards advancement of the object) is acceptable, nevertheless, the
condition imposed by sub-clause (ii) of the proviso to Section 2(15) has to also be fulfilled.
In the present case, that percentage had been exceeded, as evident from the record.
246. In the light of the foregoing discussion, this court is of the opinion that the impugned
judgment and order of the Punjab and Haryana High Court cannot be sustained, to the extent
it holds that the Tribune trust is not a GPU charity. However, having regard to the factual
analysis, the judgment needs no interference.
(b) Shri Balaji Samaj Vikas Samiti
80
247. The revenue appeals a decision of the Allahabad High Court157 affirming the order of
the ITAT which had directed the CIT to grant registration under Section 12AA of the Income
Tax Act.
248. The assessee is a registered society which was formed with the object of establishing
and running a health club, Arogya Kendra; its object included organization of emergency
relief centres, etc. Other objects, included promotion of moral values, eradication of child
labour, dowry, etc. The assessee had entered into arrangements with the state agencies to
supply mid-day meals to students of primary schools in different villages through contracts
entered into with the Basic Shiksha Adhikari, District Meerut. It is a matter of record that the
materials for preparation of mid-day meal was supplied by the government. The assessee
society claimed that it only obtains nominal charges for preparation of mid-day meals. The
assessee’s claim for registration was rejected on the ground that it was involved in
commercial activity. Upon appeal, the ITAT agreed with the assessee that supply of mid-day
meals did not constitute business or commerce and that it promoted the objects of general
public utility.
249. The revenue in its appeal contends that the assessee’s only activity for the relevant
year was supply of mid-day meals to primary schools. This was not relatable to any object
of the society. The assessee’s contention is that the state ordinarily would have carried on
the activity of supply of mid-day meals. Yet, nevertheless it outsourced its activity to an
outside agency like the assessee which performed it for nominal charges.
250. This court is of the opinion that there is no clarity with respect to whether the activity
of supplying mid-day meals falls within the objects clause of the assessee society. The order
of the ITAT as well as the High Court disclosed that the assessee’s objects involved
maintenance of health clubs, Arogya Kendra, promotion of moral values and provision of
emergency relief. These do not however include the activity which it actually performed, i.e.,
entering into contracts for supply of mid-day meals and the activity of cooking and supply of
mid-day meals. In the absence of fuller material, it would not be possible for the court to
assess the activity with which the assessee was engaged, and determine whether it could
be said to legitimately fall within the description of GPU.
251. The first consideration would be whether the activity concerned was or is in any
manner covered by the objects clause. Secondly, the revenue authorities should also
consider the express terms of the contract or contracts entered into by the assessee with
the State or its agencies. If on the basis of such contracts, the accounts disclose that the
amounts paid are nominal mark-up over and above the cost incurred towards supplying the
services, the activity may fall within the description of one advancing the general public utility.
If on the other hand, there is a significant mark-up over the actual cost of service, the next
step would be ascertain whether the quantitative limit in the proviso to Section 2(15) is
adhered to. It is only in the event of the trust actually carrying on an activity in the course of
achieving one of its objects, and earning income which should not exceed the quantitative
limit prescribed at the relevant time, that it can be said to be driven by charitable purpose.
252. This court, in the normal circumstances, having regard to the above discussion, would
have remitted the matter for consideration. However, it is apparent from the records that the
tax effect is less than Rs.10 lakhs. It is apparent that the receipt from the activities in the
present case did not exceed the quantitative limit of Rs.10 lakhs prescribed at the relevant
157
Dated 09.02.2018 in ITA 49/2014.
81
time. In the circumstances, the impugned order of the High Court does not call for
interference.
IV. Summation of conclusions
253. In view of the foregoing discussion and analysis, the following conclusions are
recorded regarding the interpretation of the changed definition of “charitable purpose” (w.e.f.
01.04.2009), as well as the later amendments, and other related provisions of the IT Act.
A. General test under Section 2(15)
A.1. It is clarified that an assessee advancing general public utility cannot engage itself in
any trade, commerce or business, or provide service in relation thereto for any consideration
(“cess, or fee, or any other consideration”);
A.2. However, in the course of achieving the object of general public utility, the concerned
trust, society, or other such organization, can carry on trade, commerce or business or
provide services in relation thereto for consideration, provided that (i) the activities of trade,
commerce or business are connected (“actual carrying out…” inserted w.e.f. 01.04.2016) to
the achievement of its objects of GPU; and (ii) the receipt from such business or commercial
activity or service in relation thereto, does not exceed the quantified limit, as amended over
the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20%
of total receipts of the previous year, w.e.f. 01.04.2016);
A.3. Generally, the charging of any amount towards consideration for such an activity
(advancing general public utility), which is on cost-basis or nominally above cost, cannot be
considered to be “trade, commerce, or business” or any services in relation thereto. It is only
when the charges are markedly or significantly above the cost incurred by the assessee in
question, that they would fall within the mischief of “cess, or fee, or any other consideration”
towards “trade, commerce or business”. In this regard, the Court has clarified through
illustrations what kind of services or goods provided on cost or nominal basis would normally
be excluded from the mischief of trade, commerce, or business, in the body of the judgment.
A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there
is no conflict. Carrying out activity in the nature of trade, commerce or business, or service
in relation to such activities, should be conducted in the course of achieving the GPU object,
and the income, profit or surplus or gains must, therefore, be incidental. The requirement in
Section 11(4A) of maintaining separate books of account is also in line with the necessity of
demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not
been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section
10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this
interpretation and bring uniformity across the statutory provisions.
B. Authorities, corporations, or bodies established by statute
B.1. The amounts or any money whatsoever charged by a statutory corporation, board or
any other body set up by the state government or central governments, for achieving what
are essentially ‘public functions/services’ (such as housing, industrial development, supply
of water, sewage management, supply of food grain, development and town planning, etc.)
may resemble trade, commercial, or business activities. However, since their objects are
essential for advancement of public purposes/functions (and are accordingly restrained by
way of statutory provisions), such receipts are prima facie to be excluded from the mischief
of business or commercial receipts. This is in line with the larger bench judgments of this
court in Ramtanu Cooperative Housing Society and NDMC (supra).
82
B.2. However, at the same time, in every case, the assessing authorities would have to apply
their minds and scrutinize the records, to determine if, and to what extent, the consideration
or amounts charged are significantly higher than the cost and a nominal mark-up. If such is
the case, then the receipts would indicate that the activities are in fact in the nature of “trade,
commerce or business” and as a result, would have to comply with the quantified limit (as
amended from time to time) in the proviso to Section 2(15) of the IT Act.
B.3. In clause (b) of Section 10(46) of the IT Act, “commercial” has the same meaning as
“trade, commerce, business” in Section 2(15) of the IT Act. Therefore, sums charged by such
notified body, authority, Board, Trust or Commission (by whatever name called) will require
similar consideration – i.e., whether it is at cost with a nominal mark-up or significantly higher,
to determine if it falls within the mischief of “commercial activity”. However, in the case of
such notified bodies, there is no quantified limit in Section 10(46). Therefore, the Central
Government would have to decide on a case-by-case basis whether and to what extent,
exemption can be awarded to bodies that are notified under Section 10(46).
B.4. For the period 01.04.2003 to 01.04.2011, a statutory corporation could claim the benefit
of Section 2(15) having regard to the judgment of this Court in the Gujarat Maritime Board
case (supra). Likewise, the denial of benefit under Section 10(46) after 01.04.2011 does not
preclude a statutory corporation, board, or whatever such body may be called, from claiming
that it is set up for a charitable purpose and seeking exemption under Section 10(23C) or
other provisions of the Act.
C. Statutory regulators
C.1. The income and receipts of statutory regulatory bodies which are for instance, tasked
with exclusive duties of prescribing curriculum, disciplining professionals and prescribing
standards of professional conduct, are prima facie not business or commercial receipts.
However, this is subject to the caveat that if the assessing authorities discern that certain
kinds of activities carried out by such regulatory body involved charging of fees that are
significantly higher than the cost incurred (with a nominal mark-up) or providing other
facilities or services such as admission forms, coaching classes, registration processing
fees, etc., at markedly higher prices, those would constitute commercial or business receipts.
In that event, the overall quantitative limit prescribed in the proviso to Section 2(15) (as
amended from time to time) has to be complied with, if the regulatory body is to be
considered as one with ‘charitable purpose’ eligible for exemption under the IT Act.
C.2. Like statutory authorities which regulate professions, statutory bodies which certify
products (such as seeds) based on standards for qualification, etc. will also be treated
similarly.
D. Trade promotion bodies
Bodies involved in trade promotion (such as AEPC), or set up with the objects of purely
advocating for, coordinating and assisting trading organisations, can be said to be involved
in advancement of objects of general public utility. However, if such organisations provide
additional services such as courses meant to skill personnel, providing private rental spaces
in fairs or trade shows, consulting services, etc. then income or receipts from such activities,
would be business or commercial in nature. In that event, the claim for tax exemption would
have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act.
E. Non-statutory bodies
E.1. In the present batch of cases, non-statutory bodies performing public functions, such
as ERNET and NIXI are engaged in important public purposes. The materials on record
83
show that fees or consideration charged by them for the purposes provided are nominal. In
the circumstances, it is held that the said two assessees are driven by charitable purposes.
However, the claims of such nonstatutory organisations performing public functions, will
have to be ascertained on a yearly basis, and the tax authorities must discern from the
records, whether the fees charged are nominally above the cost, or have been increased to
much higher levels.
E.2. It is held that though GS1 India is in fact, involved in advancement of general public
utility, its services are for the benefit of trade and business, from which they receive
significantly high receipts. In the circumstances, its claim for exemption cannot succeed
having regard to amended Section 2(15). However, the Court does not rule out any future
claim made and being independently assessed, if GS1 is able to satisfy that what it provides
to its customers is charged on cost-basis with at the most, a nominal markup.
F. Sports associations
So far as the state cricket associations are concerned (Saurashtra, Gujarat, Rajasthan,
Baroda, and Rajkot), this Court is of the opinion that the matter requires further scrutiny, in
light of the discussion in paragraphs 228-238 of the judgment. Accordingly, a direction is
issued that the AO shall adjudicate the matter afresh after issuing notice to the concerned
assessees and examining the relevant material indicated in the previous paragraphs of this
judgment. Furthermore, if any consequential order needs to be issued, the same shall be
done and resulting actions, including assessment orders shall be passed in accordance with
the law under relevant provisions of the IT Act.
G. Private Trusts
So far as the appeal by assessee-Tribune Trust is concerned, it has been held that despite
advancing general public utility, the Trust cannot benefit from exemption offered to entities
covered by Section 2(15) as the records reveal that income received from advertisements,
constituted business or commercial receipts. Consequently, the limit prescribed in the
proviso to Section 2(15) has to be adhered to for the Trust’s claim of being as a charity
eligible for exemption, to succeed. Therefore, despite differing reasoning, this court has held
that the impugned judgment of the High Court does not call for interference.
H. Application of interpretation
H. At the cost of repetition, it may be noted that the conclusions arrived at by way of this
judgment, neither precludes any of the assessees (whether statutory, or non-statutory)
advancing objects of general public utility, from claiming exemption, nor the taxing authorities
from denying exemption, in the future, if the receipts of the relevant year exceed the
quantitative limit. The assessing authorities must on a yearly basis, scrutinize the record to
discern whether the nature of the assessee’s activities amount to “trade, commerce or
business” based on its receipts and income (i.e., whether the amounts charged are on cost-
basis, or significantly higher). If it is found that they are in the nature of “trade, commerce or
business”, then it must be examined whether the quantified limit (as amended from time to
time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption.
254. In accordance with the foregoing discussion, and summary of conclusions, the
numerous appeals are disposed of as follows:
84
(i) The revenue’s appeals against the Improvement Trust, Moga 158 , the Hoshiarpur
Improvement Trust 159 , Bathinda Improvement Trust 160 , Fazilka Improvement Trust 161 ,
Sangrur Improvement Trust 162 ; Patiala Improvement Trust 163 , Jalandhar Improvement
Trust164, Kapurthala Improvement Trust165, Pathankot Improvement Trust166, Improvement
Trust, Hansi167, and the Special Leave Petitions filed against the Gujarat Maritime Board168
and Karnataka Water Supply and Drainage Board169 are rejected.
(ii) The revenue’s appeals against Ahmedabad Urban Development Authority 170 , the
Gujarat Housing Board171, the Gandhinagar Urban Development Authority172, Rajkot Urban
Development Authority 173 , Surat Urban Development Authority 174 , Jamnagar Area
Development Authority 175 , and the Gujarat Industrial Development Corporation 176 are
rejected. Likewise, the revenue’s appeals against Agra Development Trust 177 ; UP Awas
Evam Vikas Parishad178; Raebareli Development Authority179, Rajasthan Housing Board180;
Mangalore Urban Development Authority181; Mathura Vrindavan Development Authority182;
Meerut Development Authority 183; Belgaum Development Authority184; Moradabad Urban
Development Authority 185 , Yamuna Expressway Industrial Development Authority 186 ;
Greater Noida Industrial Development Authority 187 ; New Okhla Industrial Development
Authority188 and Karnataka Industrial Areas Development Board189 are rejected.
(iii)The revenue’s appeals190 against ICAI are dismissed and for the same reasons, the
appeals191 filed by the ICAI are hereby allowed.
158
CA Nos. 9974/2018 and 10371/2017
159
CA Nos. 12058/2017 and 9886/2018
160
CA Nos. 16375/2017, 2047/2019 and Diary No. 5683/2019
161
CA No. 10598/2018
162
CA No. 17527/2017
163
CA Nos. 9860/2018, 8321/2018, 2335/2019, 4449/2019 and 4957/2019
164
CA Nos. 12869/2017 and 10406/2018
165
CA No. 11259/2018
166
D. No. 44856/2018
167
CA No. 9200/2018
168
SLP (C) Nos. 3759/2021, 4612/2021, 5167/2021, 4678/2021, 4636/2021, 4723/2021, 7854/2021 and 11683/2021
169
SLP (C) Nos. 8364/2021
170
CA Nos. 21762/2017, 5719/2018, 6762/2018, 3343/2018, 3359/2018, 1643/2019, 3971/2019, SLP (C) 6686/2021, and SLP (C)
No. 6580/2021
171
CA No. 6553/2019 and 783/2020
172
SLP (C) No. 5709/2021, 6005/2021 and 10490/2021
173
SLP (C) No. 7003/2021; 7166/2021; 6917/2021; 7510/2021; 7290/2021 and 7606/2021
174
SLP (C) No. 10908/2021; 7789/2021 and 11072/2021
175
SLP (C) No. 7302/2021 and 7011/2021
176
D. Nos. 39525/2017, 15525/2019, 21237-2019; 15488/2019; 15489/2019 and 21237/2019; CA Nos. 39713972/2018,
170/2019; SLP (C) No. 15055/2019
177
C.A No. 10114/2018
178
SLP(C) No. 12304/2018
179
C.A. No. 6489/2018
180
SLP (C) No. 10912/2018
181
C.A No. 9172/2018
182
C.A No. 11884/2018
183
C.A No. 226/2019
184
C.A. No. 213/2020
185
SLP (C) No. 7779/2018
186
SLP (C) No. 14574/2019
187
C.A No. 3596/2018
188
CA No. 3347/2018
189
CA Nos. 4430/2021, 2477/2021, 2478/2021
190
CA Nos. 8193/2012, 5057/2012 and 4196/2015
191
SLP (C) No. 23975/2012; and CA No. 5056/2012
85
(iv) The revenue’s appeal - C.A. No. 21845/2017, against Rajasthan State Seed and
Organic Production Certification Agency is rejected, whereas SLP (C) No. 15547/2013 filed
by Andhra Pradesh State Seed Certification Agency is allowed for the same reasons.
(v) The revenue’s appeal against APEC succeeds in part. The impugned judgment of the
High Court is set aside; the matter is remitted for the concerned years, to the Assessing
Officer. SLP (C) No. 14995/2019 is allowed, in the above terms.
(vi) In relation to the non-statutory bodies - the revenue’s appeal against ERNET fails, and
SLP (C) No. 15040/2019 is hereby dismissed; and similarly the impugned judgment in
relation to NIXI is confirmed – SLP(C) No. 15079/2019 is therefore dismissed. However, the
revenue’s appeals against GS1 – C.A. No. 5058/2014 and C.A. No. 4374/2015, are hereby
allowed and the impugned judgments are set aside, for the reasons elaborated in the body
of the judgment.
(vii) The revenue’s appeals against the cricket associations before this court succeed in
part, and the impugned judgments of the Gujarat High Court and Rajasthan High Court are
hereby set aside. The matter is remitted to the concerned authorities for determination of the
question afresh in the light of the above discussion and observations. D. No. 16597/2020,
C.A No. 7643/2018, C.A No. 8554/2018, D. No. 17255-2020, SLP (C) No. 1404/2021, D.
No. 19394-2020, D. No. 19399-2020, D. No. 19403-2020, SLP (C) No. 11486/2020, SLP (C)
No. 11124/2020, D. No. 19449-2020, SLP (C) No. 12206/2020, D. No. 20986-2020, D.
No.23310-2020, SLP (C) No. 6253/2021, SLP(C) No. 19044/2021, D. No. 5806/2021, D. No.
6662/2021 are hereby allowed.
(viii) In relation to the private trusts, the appeal filed by the assesseee, Tribune Trust - CA
9380/2017 is dismissed. The revenue’s appeal – SLP (C) No. 30597/2018, against Shri
Balaji Samaj Vikas Samiti is dismissed, on account of low tax effect.
255. This batch of matters is disposed of, in the above terms. Pending applications, if any,
are dismissed.
© All Rights Reserved @LiveLaw Media Pvt. Ltd.

*Disclaimer: Always check with the original copy of judgment from the Court website. Access it here
86

865 Assistant Commissioner of Income Tax V Ahmedabad Urban Development Authority 19 Oct 2022 440396

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

865 Assistant Commissioner of Income Tax V Ahmedabad Urban Development Authority 19 Oct 2022 440396

Uploaded by

Copyright:

Available Formats

2022 LiveLaw (SC) 865

IN THE SUPREME COURT OF INDIA

© All Rights Reserved @LiveLaw Media Pvt. Ltd.

You might also like